Mining Cash Pile Signals Investor Payday as Markets Rally

(Bloomberg) -- Less than a year after a commodities slump brought the mining industry to its knees, major producers of metals and minerals are so flush with cash that they’re starting to share more with investors.

Not only have shares surged with the rebound in prices, but asset sales and cost-cutting prompted by the downturn have left companies like Glencore Plc and Vale SA more streamlined and profitable. Analysts are adjusting earnings estimates for next year amid a dizzying rally in everything from coal to iron ore. The cash bonanza will allow mine owners to focus on reducing debt, but will also leave plenty for potential share buybacks and higher dividends.

“2016 was all about survival and recovery. 2017 is cash flow and capital returns,” Christopher LaFemina, an analyst with Jefferies LLC, said by telephone from New York. “It’s going to be the theme in the industry.”

Mining Cash Pile Signals Investor Payday as Markets Rally

After three years of losses, an index of industrial metals has rallied 26 percent this year -- with iron ore up 80 percent and steel-making coal soaring almost 300 percent. Demand has stabilized in China, one of the world’s biggest consumers, and prospects for raw-materials got a boost with the election last month of U.S. President-elect Donald Trump, who pledged to invest in infrastructure and revitalize the economy.

At the same time, mine closures during the slump have curbed supply and left the industry in better shape to benefit from the rebound. After expansions earlier in the decade led to soaring debt just as prices fell and cash flow weakened, many companies aren’t eager to resume investments in new supply. Since 2014, miners have shed more than $80 billion in assets while trimming costs, according to data from Bloomberg Intelligence.

That’s lifted profitability. In the last three months, analysts have increased their 2017 earnings forecasts for the biggest miners by 50 percent on average. Estimates for Anglo American Plc and Glencore have more than doubled, while analysts have raised their earnings expectations for BHP Billiton Ltd. by almost 75 percent.

Mining Cash Pile Signals Investor Payday as Markets Rally

On Thursday, Baar, Switzerland-based Glencore said it would reinstate $1 billion in dividend payments in 2017, after earlier this year skipping two payments and asking investors for a cash infusion through an emergency share sale. Rio de Janeiro-based iron-ore producer Vale said Monday it will resume dividend payments in December. On Wednesday, Toronto-based Lundin Mining Corp. announced it would start paying a 3-cent quarterly dividend next year.

“Debt reduction is still, first and foremost, the main goal of the mining community but we can now talk about additional capital returns above and beyond that,” Jeremy Sussman, an analyst with Clarksons Platou Securities, said in an interview from New York. “Dividends have been cut by so much I think that, for the industrial miners, that’s generally where we’ll see that additional cash flow go.”

The Bloomberg World Mining Index fell 1.2 percent at 6.33 a.m. in New York Friday, paring its gain this year to 40 percent. The gauge of raw materials suppliers is headed for its first increase in four years. BHP Billiton fell 2.3 percent in Sydney, while Rio Tinto Group dropped 1.1 percent as metals retreated from recent gains.

Many mining companies are still “shell-shocked” and will be slow to invest in growth, said Kenneth Hoffman, an industry analyst at Bloomberg Intelligence. Resuming dividends will be the first step toward rewarding shareholders, but producers won’t focus on boosting output until debt comes down, Hoffman said.

“Share buybacks are possible, but likely not until 2018,” he said.

Mining Cash Pile Signals Investor Payday as Markets Rally

After sliding from a 2012 peak, dividends among the world ’s 50 most valuable miners will rise from 25 cents a share on average this year to 32 cents next year, according to analysts tracked by Bloomberg.

Industry behemoths BHP and Rio Tinto tie their dividend payments to profit, to the detriment of investors when conditions are tough. However, those structures mean investors can expect dividend increases as commodities prices rise.

Even if the rally doesn’t last much longer, dividends probably will rise because mine owners are now more streamlined, LaFemina said. Rio Tinto, for example, is aiming to generate an additional $5 billion in free cash flow in the next five years, while continuing to cut costs. “You’re going to get very substantial capital returns from companies like Rio because the cash flow is so ridiculous right now,” he said.

More than half of Rio Tinto’s earnings are generated from iron ore. But even if prices drop back to $50 a ton from around $78 now, the company will be positioned to buy back shares or issue an enhanced dividend within the next 18 months, LaFemina said. He doesn’t see either Rio Tinto or BHP boosting its payout ratio anytime soon.

Payout Plans

In a Nov. 17 research note, Macquarie analysts said BHP’s interim dividend for 2017 could be more than the minimum payout ratio requirement, with the company likely to see earnings and cash flow swell in the second half.

In August, BHP Chief Executive Officer Andrew Mackenzie acknowledged that the company’s payout was historically low. But he told analysts that the Melbourne-based producer made a “Solomon-like judgment” to allocate some cash to improving its balance sheet as well as to dividends. At the time, he said BHP would be committed to that ratio for a while.

A spokesperson for BHP referred back to earlier comments on dividend policy made in February, and a Rio Tinto spokesman declined to comment.

Different Timelines

For some miners, the time-line for rewarding investors will likely be further out. In a recent interview, Freeport-McMoRan Inc. CEO Richard Adkerson made clear his company’s focus will continue to be debt reduction, even with copper prices up 23 percent in 2016 after three straight years of declines.

Others, including Teck Resources Ltd., will be under pressure from investors to boost dividends because of soaring prices for metallurgical coal and zinc, Sussman said.

Teck CEO Don Lindsay has said debt reduction remains his main objective, though he’s open to raising the dividend. A company spokesman said the board “will likely look seriously” at the dividend in April.