* Small, mid-cap miners face deep output cuts
* Mining giants better equipped to tackle crisis
* Profit margins hover near record lows
By Atul Prakash
LONDON, Sept 25 (Reuters) - Investors in smaller mining
companies are likely to suffer further losses as the recent
plunge in commodities prices to multi-year lows pushes some
firms to the brink of extinction.
Without the heft of a Glencore GLEN.L , which has
suspended dividends, issued new shares and plans asset sales
to cut debt after its share price plunged 60 percent in three
months, smaller players may struggle to raise new funds.
That has prompted some analysts to advise investors to stay
away from the sector, even though they say a rebalancing of
demand and supply could underpin metals prices and improve the
prospects of basic resources companies in the longer term.
"The market has to adjust so demand and supply come back
into balance. Current developments in commodity prices suggest
that it is going to happen faster than people had expected,"
said Tom Gidley-Kitchin, mining analyst at Charles Stanley.
"Smaller miners tend to get lower quality assets and lower
margins and are more focused on exploration than mining. That's
not something people are interested in funding at the moment."
Shares in small-cap company Lonmin LMI.L , once a FTSE 100
constituent, have sunk nearly 90 percent this year, while First
Quantum Minerals FQM.L has lost about two-thirds of its share
price as investors fret about their earnings and margins.
In contrast, global diversified mining giants like Rio Tinto
RIO.L and BHP Billiton BLT.L are down around 20 percent.
They have outperformed Glencore, whose shares plunged to an
all-time low on Friday despite its more diversified earnings
stream from mining and trading. ID:nL5N11D0O4
Earlier this month, Oracle (NYSE:ORCL) Mining OMN.V defaulted on some
loan agreement covenants, while Incwala Platinum got some funds
from WPL to meet covenants and other obligations.
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As tanking commodity prices hit profit margins, smaller
players' reliance mainly on single commodities and heavy
dependence on lending are making life even harder for them,
analysts said.
According to Thomson Reuters Datastream, profit margins of
European miners have been hovering near record lows, having
fallen to about 11 percent from 17 percent at the start of the
year and from a high of 45 percent in 2011.
"It's not a good time to get back into the sector. As long
as commodity prices stay weak and economic concerns remain
there, I don't think investors should include miners in their
portfolios," Christian Stocker, strategist at UniCredit, said.
Gidley-Kitchin of Charles Stanley also said it was too risky
at this stage to add holdings in the sector as earnings were
going to take a lot of time to recover, but added that large-cap
players had relatively better prospects.
SUPPLY DESTRUCTION
Didier Duret, global chief investment officer at ABN AMRO
Private Banking, which manages about $500 billion, said there
would be a lot of "supply destruction".
"This is a very unfavourable environment for smaller players
for sure. Some mining companies are going to be bankrupt."
Some early-stage mining companies hit particularly hard by
the plunge in metals prices -- copper is at a six-year low --
are shifting away from exploration and starting new ventures
ranging from exporting eggs to medical marijuana farming.
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These firms typically find the deposits that larger miners
acquire and develop into mines. Their search for alternative
ventures has given rise to concerns that when prices eventually
rebound, there will be fewer junior miners and a reduced pool of
new mine prospects.
"If you are not working on the 100 percent capacity, there
is really not a point in running them at all," Liberum mining
analyst Benjamin Davis said. "It's not a case of pulling back.
It's either full steam ahead or not at all."
Earlier this month, Goldcorp G.TO cut its 2015 production
forecast for its newest mine, the Eleonore gold mine in Quebec,
while in July, Canadian miner Teck Resources TCKb.TO said it
needed to cut another 10 million tonnes of production.
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(Editing by Catherine Evans)