If you thought Swiss mining giant Glencore's new strategy of production and cost cuts is too far removed from our market to have a direct impact – think again.
This is a big turnaround for Glencore which has insisted it can "walk and chew gum" – meaning it can pay dividends and protect its credit rating at the same time.
But Glencore has finally conceded that it will have to undertake harsh cost-cutting measures to reduce the $US30 billion debt pile by a third in the weak commodity price environment and has pledged not to pay a dividend for a year, sell assets and undertake a capital raising.
It will also remove 400,000 tonnes of copper cathode from the market by suspending production at its mines in Zambia and the Democratic Republic of Congo.
If you thought the bitter medicine would have depressed the share price further, you'd be wrong again. The stock surged 11.7% in London in the past two days since the news.
There are four things for Australian investors to note about this development. The first is Glencore's austerity drive has not stopped experts from speculating about its potential takeover bid for base-metals miner South32 Ltd (ASX: S32).
Making another tilt for Rio Tinto Limited (ASX: RIO) is probably off the cards for now but some analysts think buying South32 could actually help Glencore with its deleveraging effort, reports the Australian Financial Review.
The idea is that Glencore will make an all-scrip bid for South32, which has a conservative debt to asset ratio and around $900 million in cash.
Secondly, Glencore's share price reaction is a lesson for local resource companies that are under pressure due to speculation that they will have to undertake a capital raising.
Santos Ltd (ASX: STO) is one that readily comes to mind even though some analysts think they can escape tapping shareholders for cash due to its ongoing asset sale program.
It's too early to say how much Santos can get from asset divestments, but I think even if it gets "enough", it will only be just enough given the $9 billion of debt on its balance sheet. If management uses the recent bounce in the share price to sell new shares, it will give the company more breathing room to weather the slump in the oil price.
Thirdly, Glencore's dividend suspension has prompted some to ask if BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) should reconsider their progressive dividend policy.
The short answer is "no" – at least not right now. The fact is, BHP's and Rio Tinto's balance sheets are in far better health than Glencore's and both of the Australian miners should have little trouble meeting their dividend targets in the short term unless commodity prices crash further from here.
Lastly, shareholders in copper producers OZ Minerals Limited (ASX: OZL) and Sandfire Resources NL (ASX: SFR) should be pleased with Glencore as the copper price has jumped over 6% on news of the production cut.
The outlook for the red metal has certainly brightened and other copper producers could follow Glencore's lead to curtail supply of the commodity.