BHP Billiton and Rio Tinto Group, the world's biggest mining companies, could sell as much as $US21 billion ($29.7 billion) of shares to help them buy assets from distressed industry rivals, said analysts at Bank of America. Mining shares were leading the FTSE 100 lower in afternoon trade in London on Wednesday.
"The 'blue chip' large cap miners, i.e. BHP and Rio, could consider raising equity to be ready to acquire distressed tier-one assets," analysts led by Jason Fairclough wrote in a note to clients. "We think there is no time like the present. Strengthening balance sheets would give flexibility if/when tier-one assets come to market."
BHP could raise as much as $US15.4 billion and Rio $US5.7 billion to curb reliance on debt, the analysts said.
In London trade Wednesday, BHP slid as much as 7 per cent, the most in two months, and Rio Tinto sank as much as 6.2 per cent to a more than six-year low as concerns over weakening growth in China spurred losses in global stock markets.
The Bloomberg World Mining Index of 80 companies fell 1.7 per cent to the weakest in seven years.
A Rio spokesman and BHP spokeswoman declined to comment.
Miners are being battered by headwinds from slowing growth in demand from China, their biggest customer, and gluts in commodities like copper and iron ore. That has forced most to scrap dividends and sell assets. Smaller rivals to BHP and Rio such as Glencore and Freeport McMoran have already sold shares to strengthen their finances.
"A capital raise by 'blue chip' players in the space might hasten the onset of distress of other more leveraged companies" including Anglo American, Fortescue Metals Group and Teck Resources, Bank of America said.
"Our discussions with investors suggest that there may be a limited pool of equity available for recapitalisations," the analysts wrote. "If 'blue chips' were to move early, it might make it more difficult for other lower quality, more leveraged companies to access equity markets," allowing the stronger miners to buy assets or competitors.
In late trade, the FTSE 100 was down 1.3 per cent. BHP fell 5.7 per cent, Rio lost 5.3 per cent, Anglo dropped 4.9 per cent and Glencore was 3.7 per cent lower.
The share slump came as copper hit a two-week low as a weak yuan and poor Chinese services sector data fanned fears over slowing growth. Benchmark three-month copper on the London Metal Exchange traded down 0.9 per cent at $US4602 a tonne in official midday rings, having hit a low of $US4593 earlier. Prices have fallen some 2 per cent this week, following a drop of 25 per cent last year.
Copper's falls came despite news that China's state stockpiling agency is expected to start buying as much as 150,000 tonnes of domestic copper in a bid to support prices.
"The fact that this didn't have a positive impact on the market tells you sentiment is very bearish," said Julius Baer analyst Carsten Menke. "The production cuts (announced last year) do not seem sufficient to tighten the market," he added
Separately, Schroders, one of Anglo's biggest investors, has urged executives at the mining company to resist mounting pressure to raise cash during the commodities rout.
"Anglo American is not in acute financial difficulty," Schroders wrote to Mark Cutifani, the chief executive officer of Anglo, in a December 15 letter obtained by Bloomberg News. "Issuing new equity because this is what is demanded by sell side analysts or media commentary, however intense, is unlikely to be in the best interests of long-term shareholders."
Anglo was the worst stock in the FTSE 100 Index last year, plunging 75 per cent as commodity prices collapsed from waning Chinese demand for copper to iron ore. Last month, in an effort to save the business, the company said it would scrap its dividend, cut the number of mines it owns by more than half and reduce staff to 50,000 from 135,000.
"We believe in Anglo American," said Schroders, which owns 3.6 per cent of Anglo and is Europe's largest publicly traded fund manager. "We believe it to have a core of high quality assets with attractive long-term futures, even in a more challenged commodity price environment."
A spokesman at Anglo declined to comment.