Miners are coming under growing pressure to boost shareholder returns and redress a balance that has seen profit from higher commodity prices ploughed into mammoth growth programs, higher salaries and rising government taxes.
Some investors are becoming more vocal in demanding improved dividend yields as weak economies and low interest rates pummel returns.
The situation has been exacerbated in the mining sector by the increased cost of new projects and a view that prices could ease over the long-term -- fuelling doubts in some camps over the benefit of multibillion-dollar growth plans.
Analysts say the key to attracting investors is to rebalance the allocation of cash. Returns, they argue, matter.
According to Deutsche Bank research published on Friday, which considers the cumulative benefits since the start of the metal price boom in 2006, shareholder returns for a basket of the four major diversified miners are up 174 per cent.
That compares with a 447 per cent increase in the amount paid to governments in taxes and royalties, and a 210 per cent increase in average salaries paid to staff.
“As the mining industry embarks on a breathtaking capex program... owners/equity holders should rightfully be asking whether they have had commensurate returns on their current investment, before embarking on more,” Deutsche analysts said.
“Our view is that they have not.”
Mining companies typically allocate excess cash first to organic growth, then to growth by acquisition. Only after that do they consider returning cash to shareholders. This is in large part because of miners’ need to keep replenishing their asset base, so depleted mines can be replaced.
But with the cost of developing new mines increasing -- not least because of lower grades in some metals and more difficult operating environments -- and prices expected to ease over the long term, investors are asking whether they should be getting a larger share of the surplus instead of seeing cash automatically invested in organic growth.
The top five London-listed miners have capex plans totalling more than $110-billion from 2012 to 2014.
“Despite everything, prices are high right now, margins are decent, so understandably companies are falling over themselves to increase production and to ride that wave, but at the end of the day as an investor your objective is slightly shorter term,” said analyst Nik Stanojevic at investment manager Brewin Dolphin.
“There is a balance and certainly maybe it has gone too far towards the growth capex side and I do feel that investors are clamouring for more returns.”
Chilean copper miner Antofagasta is cited as an example of why it pays to return cash consistently. Though it is operationally exposed to one country and one commodity and has a relatively low free-float, it trades at a price/earnings premium of more than 40 per cent to the four major diversified miners -- BHP Billiton, Rio Tinto, Anglo American and Xstrata.
According to Deutsche Bank, Antofagasta -- majority-owned by Chile’s Luksic family -- has returned 368 per cent of an orginal investment at the end of 2005, but dividends from 2006 would alone have covered a third of the purchase price.
“Companies have been looking to reinvest, reinvest, reinvest and haven’t given anything back to shareholders. The shareholders are complaining and they are on a buyers’ strike -- that is what is happening to gold shares,” Evy Hambro, fund manager BlackRock’s investment chief for natural resources, said last week.
But that is changing, he added, with an increasing awareness of the need to return more of the boom-year benefits to shareholders seen in moves like that of Canada’s Eldorado Gold and Newmont, which have tied dividends to the gold price.
“Every gold company that comes through our office now is talking about the increasing the dividends.”Report Typo/Error