Miners spend on shareholders, not projects
BHP, Rio Tinto and Glencore are budgeting billions for dividends and share buybacks
The world’s largest mining companies are spending big again, but it isn’t on new pits or megadeals.
Companies including Rio Tinto PLC and Glencore PLC are throwing off billions of dollars to shareholders via dividends and share buybacks, making good on a pledge to increase payouts as they dig their way out of a steep market slump. Yet executives have recently been forced to defend the payouts, amid worries that they are sacrificing opportunities for growth—such as building mines or doing deals.
“We fully acknowledge [in] the mining business you need to grow, because depletion is a reality,” said Rio Tinto Chief Executive Jean- Sébastien Jacques. Still, he said Rio Tinto wasn’t under any immediate pressure to invest more heavily.
Rio Tinto, the world’s secondbiggest miner by market value, last week said it was spending $7.2 billion on shareholder returns, including a record dividend, as it reported a 33% rise in first-half net profit. That compared with a $2.4 billion budget for big projects.
Iron-ore giant Vale SA, after also reporting a jump in firsthalf underlying earnings, said it would give shareholders $2.1 billion in dividends and buy back shares worth $1 billion. Vale, which recorded secondquarter capital expenditures at the lowest level in 13 years, said buying shares “is one of the best investments for its excess cash.”
The windfalls for investors have led mining companies to rank among the best-performing stocks globally. Rio Tinto’s Australia-listed shares have risen more than 50% over the past two years, sharply outpacing gains by the benchmark index. BHP Billiton Ltd.’s value has jumped by two-thirds over the same period.
In 2017, BHP, Rio Tinto, Glencore, Vale and Anglo American PLC showered investors with dividends worth over 50% more than the prior year, according to S&P Global Ratings. It forecasts even fatter returns in the years ahead.
While payouts have risen, capital spending has dropped to $48.3 billion in 2017 from a peak of $150.1 billion in 2012, according to commodities consultancy Wood Mackenzie. That could fall further over the next few years if more projects aren’t approved.
For Glencore, which is due to report earnings on Wednesday, miners’ conservatism is long overdue. The company was critical of the heavy investment made by Rio Tinto, BHP and others in commodities such as iron ore during the last boom because it resulted in a glut of new supply that ultimately drove down prices and industry profits. The spending spree also stretched mining-company balance sheets, forcing several midsize U.S. companies to seek bankruptcy protection.
The world’s 50 biggest mining companies spent about $1 trillion on projects during the last 20-year commodity cycle that started in the late 1990s, as they scrambled to feed China’s industrialization and support economic growth in the U.S. and elsewhere, according to Sanford C. Bernstein.
Glencore—forecast to post an almost 30% rise in net income of $3.2 billion for the first half of the year—has balanced buying back shares with deals for existing assets from Africa to Australia. Last month, the Swiss- based company said it would purchase $1 billion in stock from investors. That buyback was announced days after disclosing it had received a subpoena from U.S. authorities related to compliance with corruption and money-laundering laws at its operations in the Democratic Republic of Congo, Nigeria and Venezuela.
Heightened regulatory scrutiny and resurgent resource nationalism have played a part in big miners exiting projects in many developing countries that management had once touted as critical to their growth. Rio Tinto last month signed an initial deal to sell its stake in Grasberg, the world’s secondlargest copper mine, in Indonesia.
Jefferies LLC said the outlook is murky for aggressive expansion. An escalating conflict between the U.S. and China is threatening global trade and could stunt commodity demand if it leads to a downturn in economic growth. The firm Wood Mackenzie projects spending of just $23.1 billion in 2020, which would be the lowest in at least a decade.
Still, there are signs that some mining executives are starting to bring forward new projects, particularly focusing on metals and minerals that can feed new technologies such as lithiumion batteries and electric cars.
Anglo American last month outlined plans for a giant $5 billion copper project in Peru and almost doubled its first-half capital expenditures to $1.2 billion, compared with a $630 million interim dividend. Rio Tinto is building a bauxite pit in Australia and an underground copper mine in Mongolia.
Wood Mackenzie analyst Michael Sinden said those investments don’t go far enough. It can take five to 10 years for new mines to start up, so companies risk being unable to capitalize on any sudden rally in commodity prices. Many of the world’s biggest pits have been operating for decades and existing ore sources risk becoming tapped out. A supply shortfall would then pose a worrisome challenge to commodity users as higher prices mean bigger costs.