London - The last time mining companies made this much
money, they went on a debt-fuelled buying spree that almost buried some of the
biggest in the industry.
Investors hope they’ve learned their lesson.
"Give us back money through the dividend process,
that’s what shareholders like,” said Clive Burstow, who helps manage about $475
million of natural-resource assets at Barings in London. "I’m hoping we’re
not going to start hearing about M&A coming back on the table."
The turnaround in miners’ fortunes is startling.
Commodity prices that fell by half from a peak in 2011 wrecked the value of
acquisitions and investments in new mines from preceding years. Even giants
such as Glencore Plc and Anglo American were left heaving under the weight of
their borrowings as cash flow and profits plunged.
Yet the slump was a catalyst for the biggest
restructuring of operations in decades. Weak units were sold, dividends cut or
scrapped and debt axed. After all that streamlining, the outlook got even
better as commodity prices rebounded, fuelled by improved demand from China.
By 2016, diversified miners generated a total of $12.9
billion of spare cash, from just $153 million two years before, UBS Group AG
said. They’re set to deliver $47 billion beyond what’s needed for dividends in
the next three years, the bank said in a note. Clarksons Platou Securities Inc.
forecasts the highest so-called free cash flow for the industry this year since
2011.
More worrying for shareholders who prefer the companies
to distribute more cash is that mining deals are on the rise. While still about
half the level of five years ago, the combined value of transactions doubled in
2016, according to data compiled by Bloomberg.
“The lessons are still pretty fresh in everyone’s mind
from the 2011 and 2012 period where windfall profits were used to build huge
projects,” said Richard Knights, a mining analyst at Liberum Capital Ltd. in
London. “There are not many examples of big M&A that went well.”
Mining companies spent more than $200 billion on deals in
2011 and 2012 as prices for many minerals surged to records. That’s more than
in the last four years combined.
The result was a borrowing binge that drove debt at the
10 biggest miners to an all-time high of $145 billion, leaving them
ill-equipped to deal with the following five years of declining commodity
prices.
Shareholders paid the price for that extravagance.
After years of ever-increasing payouts, Rio Tinto and BHP
Billiton Ltd. halted these so-called progressive dividend policies. Glencore
and Anglo scrapped payments altogether.
Though painful for investors, those cuts started to put
company finances in order. Some also ditched weaker operations, including
Glencore selling $6.3 billion of assets, and Anglo offloading businesses
including a niobium and phosphate unit for $1.5 billion.
Chinese revival
In addition, a gauge of commodity prices has gained more
than a third from its lows as China, the biggest consumer of raw materials,
introduced measures to revive economic growth. The rally in natural resources
will continue in the first half of this year, partly on stronger industrial
activity, according to UBS.
While it’s tempting for mining companies to take
advantage of the higher prices by boosting supply, they’ll be wary of repeating
past mistakes.
Rio Tinto CEO Jean Sebastien Jacques told investors in
December the company would demonstrate “relentless capital
discipline.” The miner may boost its payout and offer a special
dividend for 2017 after reducing debt, Credit Suisse Group AG said in a
note Friday. BHP CEO Andrew Mackenzie has said cutting borrowings is a priority
in the short term.
“All they want to do is repair balance sheets and restore
and maintain dividends,” said Neil Gregson, who manages about $2.5 billion of
natural-resources stocks at JPMorgan Asset Management in London. “Supply will
get tighter that will support prices, but companies are very reluctant to build
new mines.”
BLOOMBERG