Pile-of-cash dilemma for mining industry
Investors unsure how miners will spend their excess money
LONDON: Three years after a commodity slump left their finances in shambles, mining companies are swimming in so much cash that investors aren’t sure where the industry will spend it all.
With metals from zinc to palladium trading at multi-year highs, four of the world’s top producers generated combined free cash flow last year of about US$87mil a day.
Some of the unprecedented windfall is earmarked for dividends, which companies including BHP Billiton Ltd and Glencore Plc cut or eliminated during the slump.
Where the rest of the money goes – into new mine projects, acquisitions or a bank account – remains one of the big unanswered questions for executives, investors and bankers attending Africa’s biggest mining conference, which began yesterday in Cape Town.
Companies may be reluctant to spend too much, given the disastrous results of rapid expansions a few years ago.
“You can’t give it all back,” said Ben Davis, an analyst at Liberum Capital Markets in London. “There will be some M&A towards the back end of the year. No one wants any new mines, but you have to use this money for something, and it’s not all going as dividends.”
BHP, Glencore, Rio Tinto Group and Anglo American Plc generated US$31.9bil of free cash flow during their 2017 fiscal years, which exceeds their haul during the last commodity boom in 2011, according to analysts estimates compiled by Bloomberg. In 2018, the flow will be an estimated at US$31.2bil, encouraging companies to give more back to shareholders.
Anglo is set to make its first annual divi- dend since 2015. Rio Tinto, which made a record US$2.5bil interim payout last year and bought back more than US$2bil of shares, is forecast to make its highest ever full-year dividend and buy back another US$1.9bil of stock. Even Glencore, which usually favors deals over dividends, in December promised to double its payout this year.
Still, even after those distributions to shareholders, the industry will have US$80bil in excess cash over the next three years, according to Macquarie Group Ltd.
Companies are likely to use some money to pursue growth opportunities, but they don’t have a lot of options for new projects over the next year or so, Macquarie said. During the last commodity boom, companies built too many mines, borrowed too much and made a lot of bad deals – all of which soured when prices went south. — Bloomberg