Miners Spend on Shareholders, Not Projects
07 Agosto 2018 - 2:35PM
Dow Jones News
By Rhiannon Hoyle in Sydney and Scott Patterson in London
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 second-biggest 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
first-half underlying earnings, said it would give shareholders
$2.1 billion in dividends and buy back shares worth $1 billion.
Vale, which recorded second-quarter 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 second-largest
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 lithium-ion
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.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Scott
Patterson at scott.patterson@wsj.com
(END) Dow Jones Newswires
August 07, 2018 13:20 ET (17:20 GMT)
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