Anglo American this week provided further evidence of the hole in which the global mining sector now finds itself.

The South African giant said it would more than halve next year’s planned capital expenditure to $4.5 billion (£3 billion) in the face of “an unprecedented period of rapid declines in commodity prices”. The cuts fell most heavily on its platinum and base metal operations, but also encompassed Minas-Rio, the Brazilian iron ore project it only bought this year.

Anglo’s retrenchment came a week after Rio Tinto, laden with $39 billion of debt after its Alcan acquisition, said it would slash capital expenditure from $9 billion to $4 billion next year, and to maintenance levels of just $2 billion in 2010.

But if the major miners are hurting, the pain among their minor peers is all the more acute. Shares in Aricom, the iron ore venture once part of Peter Hambro Mining, have fallen more than 90 per cent this year, a slide which yesterday forced its ejection from the FTSE 250 index. That reshuffle also saw two other diggers, International Ferro Metals and UK Coal, follow it to the exit.

On AIM, which is home to 181 small-cap miners, the basic resources index has lost 75 per cent of its value this year, outpacing the 63 per cent drop in the wider FTSE AIM all-share. The total value of the market’s mining constituents has tumbled to less than £4 billion, against nearly £16 billion at the end of last year. Similarly, while AIM miners raised £2.4 billion in new money in 2007, that tally has fallen to £973 million in 2008, slowing to a paltry £4.3 million last month, its lowest level in more than five years.

As Tim Williams, director of mining and metals at Ernst & Young points out, the severity of such sell-offs is not new. Something similar happened in the wake of Black Monday in 1987 – albeit in a matter of days rather than seven months that have elapsed since May’s natural resources peak – and again in 1997, in the wake of the Bre-X scandal that singlehandedly shattered investor confidence in early-stage exploration plays. In that context, this year’s collapse is simply the recurrence of a once-a-decade phenomenon.

The bind for the smaller mining companies is that many are sitting on large resources that are still commercially viable even at current commodity prices but which require project development capital in a stock market where capital is unavailable. The distinction must therefore be between those companies with cash – which can scale back their operating expenditure and do enough to maintain their mining licences without incurring penalties – and those without, who must seek a well-funded joint venture partner or possible acquirer urgently.

There is already evidence that junior miners are having to seek funding just to keep ticking over. Last month, Albidon, the AIM-listed nickel explorer with interests in Africa, raised $16 million from UK investors and Jinchuan, its Chinese partner, and agreed to convert some of its debt into equity. However, those additional funds will only cover the working capital requirements of its flagship Munali project until the end of the first quarter next year. Elsewhere, Cluff Gold last month agreed to grant long-dated options over its stock to RMB in return for calling on its loan facility with the South African-owned finance house.

The extent of this year’s slide in share prices has also meant that several miners now trade at a discount to the cash on their balance sheets. Yesterday, Griffin Mining fell 14 per cent to a new low on announcing the suspension of production at Caijiaying zinc-gold mine in China after the collapse in zinc prices. That retreat means that Griffin’s equity is now valued at £25 million, against the £47 million it holds in cash. In such cases, the stock market is sending the clear signal that the value of such cash must be heavily discounted, either because it will be consumed in administrative expenses and directors’ salaries or in developing projects of limited worth.

Some of these cash-heavy companies are now taking steps to hand it back. This week, shareholders in Aurum Gold, the explorer focused on the Kyrgyz Republic and which is now valued at only £14 million, approved the return of some of its £20 million of cash. Perhaps the most acute disparity between balance sheet strength and stock market value is that of Aricom, whose equity is now worth £80 million less than its cash.

The company’s problem is that it is focused on iron ore at a time when steel production is forecast to fall next year at its sharpest rate for nearly 60 years. It also requires $2.3 billion of funding to fully exploit its two biggest projects and has all its assets in Russia, where perceived political risk has only lessened its attraction. At yesterday’s 7.6p the shares are a high-risk bet that Aricom can pare back the scale of its projects to a level that still makes then commercially viable and secure the required debt finance.

The near-term hope is economic stimulus packages in the US and China begin to feed through into commodity prices. The alternative is a protracted mothballing of mineral production that threatens to make the next upturn in the commodity cycle, be it some years away, all the more pronounced.

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