Iron resolve

Oil companies stare into the mining abyss

Oil companies can learn something from staring into the mining abyss. Shareholders punished Australia's Fortescue Metals Group after it balked at paying a high rate for its planned $2.5 billion bond deal and pulled the offer. Other rivals that were slow to raise capital after metal prices tanked suffered worse fates. Oil servicers and drillers still have a chance to save themselves.

Shares in the world's fourth-largest iron ore producer fell nine per cent at one point on Wednesday after it decided not to go through with the bond sale. That's because the deal had been designed to push out by a couple of years repayments on some of its $7.5 billion of net debt.

Shelving these plans creates no looming disaster for Fortescue. The company still has two years before its debts start coming due. But the price of iron ore has fallen by more than half over the past 12 months and will probably continue to drop as new low-cost supplies keep coming online. The worry is that bondholders will demand even more punishing terms next time Fortescue tries to sell bonds. In an extreme case, the company may even find itself shut out of the debt market.

Other highly indebted mining companies have paid a harsher price for dragging their feet. Anglo-Russian gold miner Petropavlovsk only launched a hugely dilutive rights issue last month, two and a half years after gold prices started melting. By the time it pulled the trigger, its share price had fallen 96 per cent. American bullion producer Allied Nevada Gold filed for bankruptcy earlier this month after a December capital raise failed to fix its finances.

These are lessons American shale producers and the companies that service them would do well to learn. US light crude hit a fresh six-year low near $43 per barrel this week. At that level, many shale drillers who have largely relied on junk bonds to finance a recent production boom will be unprofitable.

Some US petroleum producers and service firms are already hitting the market, launching $30 billion of new debt and equity issues since oil prices started to plunge last October. Of that, close to $9 billion has come to market just this month, according to Thomson Reuters data. Anyone still sitting on the sidelines is playing a dangerous game.