The media has run with a recent note by Bank of America mining analysts arguing now is the time to raise billions – as much as $30 billion – through new equity to take over other distressed assets.
The note garnered headlines like “BHP, Rio Tinto tipped to sell $30b of shares to fund asset buys.”
The headline might have read, “A deal-starved bank goads the cash-poor miners to piss on shareholders suffering historic share lows.”
Ok, maybe a little too harsh.
But let’s be clear. The banks and their analysts have a huge self-interest in arguing that now is the time for diversified miners – many mired in debt – to boost cash to buy other things. Indeed, the analysts give it a certain urgency. In true, 3 a.m. infomercial form, they say there may only be a limited amount of cash to go around to mining equities and that if the big ones get it first, the little ones, which they should take over, won’t have access to it.
Of course, there is a certain logic to it. Relatively speaking some of the diversifieds have enjoyed less ugly beatings as the market pile-drives the mining equities down year after year. So, still standing, they should think about padding down the near-corpses of their worst hit comrades for any jewels. Slip that gold ring off, and so forth.
And yes, generally speaking, there is a good argument for acquisitions. Look at the royalty and streaming companies munching on the precious caviar of some of the world’s biggest base metal miners (the same now goaded to turn to equity for cash).
But such acquisitions haven’t depended on massive dilution or hiring banks to run huge equity issuances.
Indeed, the diversifieds should be in a position to gobble up their smaller, or more distressed brethren, but aren’t because they did overpriced takeovers while the market was too hot. Further, they bulked up on debt during the good times. Had they not, and had they not committed to progressive-dividends-forever-over-my-dead-body, they would have incredible cash stores now to do the smart deals they might be doing. Might.
For the diversifieds now to do blow-out share issues – should they listen to the likes of Bank of America – would be an admission of failed strategy in the past decade and a slap in the face to investors that hung on.