It has been reported that BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), two of the world's largest miners, could look to sell new shares on the market to raise fresh capital.
As highlighted by The Australian Financial Review, the pair, whose shares have been crushed as a result of plunging commodity prices and a slowdown in China, could sell US$21 billion (almost AU$30 billion) worth of shares. The majority would be raised by BHP to curb its reliance on debt, whilst also firming up its balance sheet to allow it to acquire assets from other distressed rivals.
Indeed, BHP and Rio Tinto have both been crushed by the recent commodities crisis, together with fears conditions will only worsen over the coming months (or maybe even years). But unlike many of their smaller rivals, they're well equipped to weather the storm, even though their earnings results will take a hit. They maintain much lower production costs and can thus remain profitable for longer.
Other miners around the globe, on the other hand, have already been forced to close their operations for good, unable to cover their costs of production. But there are plenty that are still operating yet could look to offload some of their assets to free up additional cash.
In regards to BHP and Rio Tinto raising capital to take advantage of such opportunities, the AFR quoted analysts from Bank of America as saying: "We think there is no time like the present. Strengthening balance sheets would give flexibility if/when tier-one assets come to market." It believes BHP could look to raise US$15.4 billion, compared to US$5.7 billion for Rio.
Of course, investors have cooled on the mining sector in recent years as the mining boom has unwound, so it's likely there would be a limited pool of capital that investors would be willing to cough up. As such, the Bank of America analysts also suggested such a move by BHP and Rio Tinto would be bad news for others in the sector such as Fortescue Metals Group Limited (ASX: FMG), as it would make it increasingly difficult for those miners to do the same.
BHP's shares have fallen 0.1% today, but hit a fresh decade-low of $15.95 earlier in the session, while Rio Tinto's share price has surged a little over 2%.
