Where’s ours? Investors are keeping up the agro for a share of the spoils from the metals price boom. It’s been the classic trick choice — money now or double later? Or to spell it out — cash in hand from share-price enhancing share buy-backs and special dividend payouts, or investment in future earnings from new mines and acquisitions. With the 2007 financial mining results season well underway for the major miners, shareholder pleading seems to have got through.
Clashes have occurred with some analysts and fund managers who’ve complained that these shareholder rewards were not the best use of profits. The mining giants had been, they’ve alleged, giving away too much of their cash. There was not enough investment for future growth. Goldman Sach’s Neil Goodwin called it an "investment failure". Wilson Asset Managers’ Justin Braitling has been saying to his Sydney audience that management "has been too conservative" in going for bids or new holes in the ground.
World’s giant miners have been awash with cash
Project spending, such as Anglo American’s $7 billion budget, might sound as though it had its eyes on the future. "Rubbish," was the protesters’ riposte. That money would raise production volumes only 2% in the next four or five years!
Share buy-backs in the tens of billions of dollars have been paid out by Rio Tinto, Anglo American and BHP Billiton in the last few months. And as the number of shares available has shrunk, the price has gone up, as was intended, to reward shareholders.
Anglo added $3 billion buy back in February, bringing its 2007/8 total to $10.5 billion. BHP had already launched mining’s largest ever buy back, promising to $13 billion worth, around 8% of its market cap. Rio Tinto chipped in with a $4 billion increase in its share buy-back programme to $7 billion.
US bankers Citigroup noted then that Rio could spend $8 billion on buy-backs in 2008 and still finish debt-free. Anyway, while China booms, mining companies can snap their fingers for cash. Evidence for this? Even in current bombed out credit markets, Rio Tinto has just got the biggest loan ever for any UK company. It is taking $40 billion to cover its $38 billion bid for Alcan.
The world’s giant composite miners have been awash with cash. Their aggregate profit last year was 15 times greater than three years before. Borrowings were down to almost zilch, in spite of soaring exploration and operations costs.
The Scrooges want an end to shareholder payouts
Unconvinced, the Scrooges have been calling for an end to payouts. Mines were running out. They questioned the typical mining company growth portfolio, shaped to support annual growth of around 12%. That was to match anticipated Chinese economic growth, but was it enough.
The call for more spending on acquisitions has been pretty wide spread in London, New York, Toronto, Sydney and Johannesburg. Cynics point out that M&A activity brings banks and professional advisers humongous fees. And if Western companies do not enter the M&A fray, the Indians, Chinese, Russians or South Americans with local advisers will steal that business. Not just the bankers but global consulting and accountancy group PricewaterhouseCoopers called for action this summer.
PricewaterhouseCoopers’ Australian mining leader, Tim Goldsmith, said acquisitions still looked attractive "because it is increasingly difficult for companies to bring in new projects on time and on budget."
Some of the spending lag has been outside board control. The reality has been that the commodity boom has brought a severe shortage of skills at all levels. Equipment has also been in short supply.
Yet criticism from brokers’ analysts is a bit rich. Many have been real Jeremiahs. They’ve feared a collapse of metal prices and suggested that Chinese and Indian growth would soon run out of puff. Their consistently over-conservative forecasts, reviewed reluctantly, have been a real drag on share prices and deals. The fact that major European investment bank Credit Suisse could upgrade its metal price forecasts a couple of weeks ago by 50% shows how far they lagged reality.
Anyway, the world’s biggest miner, BHP Billiton, has just said all the things shareholders wanted to hear. As his finale, retiring CEO, Chip Goodyear said BHP had just carried out a survey of its major customers to test for any fall-out from the US sub-prime crisis. There would be some impact, with the US slowdown continuing. But for the crucial clients in China, 20% of sales, and India, 8% of sales, it was "essentially business as usual!"
But pack-leader BHP has hiked the dividend
So pack-leader, big-boy BHP hiked the final dividend by 46% — a good 5% more than those analysts were suggesting. And will continue with its share-buy-backs. It might even add to the programme. Analysts immediately upped their share price target to at least £2 above the day’s closing level of £13.65.
That bullish message will set the tone for the sector, so shareholders can relax! Gains were widespread through mining shares, especially the good bonus dividend payers, such as Antofagasta.
At Rio Tinto, however, the choice of investment over pay-outs has for now won the day. Its aggressive debt-funded knock-out bid for Alcan will mean no money for share-buy backs, but probably only for a bit. At Anglo new CEO Cynthia Carroll acknowledges AA’s being-nice-to-shareholders policy as good for the share price.
With current moves in gold, silver, platinum and the rest not being at their most exciting, the bosses understand that mining spoils need to be shared if shareholder loyalty is to be retained. Otherwise investors will agitate for what they like best — bids. Lacking those, a good payout will do nicely!
Keep asking!
Erin and Isabel
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