According to a new report, after years of bumper dividends, investors will have to get used to lower cash returns from mining giants such as BHP, Rio Tinto, Anglo American, and Glencore.
Analysis from Morningstar published today said that after “many years of returning excess cash to shareholders” at the expense of expanding portfolios through mergers and acquisitions, heightened prices are now forcing a strategic rethink.
Geological deposits are finite and deplete; be it precious metals such as gold and silver, energy fuel such as coal or energy transition metals such as zinc and copper.
This recently led HSBC’s chief economist Paul Bloxham to opine that commodities are in the midst of a “super-squeeze,” and have been for some time.
Indeed, the Energy Transition Commission warned back in July that markets could be looking at a shortage of a slew of metals like graphite, cobalt, copper, nickel and lithium in the next decade.
“Large-scale mining projects can take 15-20 years, and the last decade has seen a lack of investment in exploration and production for key energy transition materials,” the report said.
Furthermore, mining companies often develop or acquire assets when prices are high, only to find out when the cycle corrects that they overpaid and the reserves are not worth as much.
All this is likely worrying news for investors in the major miners, like Rio Tinto, BHP, Glencore and Anglo American.
These have been some of the biggest dividend payers in the world in recent years, with Glencore and Rio claiming the title of the second and third biggest dividend payers, respectively, in the FTSE 100 in 2022.
However, this is now starting to change.
Shares in Glencore slumped when it reported its results in February and revealed it would be slashing its dividend from 34 cents (27p) to 13 cents (10p) to help pay for its $6.9bn (£5.4bn) buy of Teck Resources’ coal operations.
Indeed, including the $4bn (£3.1bn) buyback programme from 2023, last year’s cash return for shareholders was just 16 per cent of that in 2022.
The firm was also much more exposed than other major miners to energy transition metals, such as zinc, lead, cobalt, and nickel, that did not see price gains in 2023.
Its peer, Rio Tinto, also cut its dividend last year off the back of a 19 per cent fall in net income.
And Anglo American slashed its dividend by more than half for 2023.
The company, which has seen its stock drop more than 40 per cent year-on-year, is shopping a stake in its Woodsmith fertiliser mine as it seeks to share the $9bn (£7bn) development cost.
It could also be looking at spinning off the struggling de Beers diamond brand, which is suffering setbacks at the hand of waning consumer demand for expensive gems.
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The last and biggest factor in the commodity mining landscape continues to be China, the largest single consumer of copper, coal and others in the world.
For as long as the Chinese proeprty market remains in flux, Morningstar contends, it will weigh on miners with exposure to resources involved in energy, steel-making, the green transition, automotive and consumer goods.
If commodity prices continue to tighten as projects become harder to find, finance and bring online in short order, investors will have to reckon with the fact that the good old days of bumper payouts may be numbered.
By CityAM
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