From FT Alphaville's MarketsLive post:
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The challenging environment for mining companies leads us to the question of how much value will be left for equity holders if commodity prices do not improve. We have adopted a P/E-based approach to evaluate how the equity value of the major diversified companies might vary over time in proportion to debt and have identified the companies where equity values are most at risk. If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.
The challenging environment for mining companies leads us to the question of how much value will be left for equity holders if commodity prices do not improve. We have adopted a P/E-based approach to evaluate how the equity value of the major diversified companies might vary over time in proportion to debt and have identified the companies where equity values are most at risk. If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.
In the current climate, debt is fast becoming the most important consideration for mining company management. “Never underestimate the ability of debt to undermine the value of equity,” neatly sums up the problem that equity holders face when considering how the highly leveraged companies, such as Glencore, see their much diminished earnings absorbed by the obligations to debtholders....
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