Miners Are Flush With Cash Again--Update

By Scott Patterson Features Dow Jones Newswires

The world's biggest miners are on a tear.

Continue Reading Below

Fueled by a sharp rise in commodities prices, companies like BHP Billiton Ltd., Glencore PLC and Rio Tinto PLC are flush with cash again, boosting dividends, cutting debt and shelling out cash for expansion projects. Just a couple of years ago, they were scrambling to survive in the midst of a historic downturn.

The world's biggest mining company, BHP, reported Tuesday a net profit of $5.9 billion for the 12 months ended June 30. That is a sharp turnaround from the previous year's loss of $6.4 billion, when the company took big charges from U.S. oil-and-gas business and a fatal 2015 dam failure at an iron-ore operation in Brazil.

BHP boosted its annual dividend by 177% and said its net debt had fallen 38% from the previous year to $16.3 billion.

BHP's report caps a strong string of financial results for mining giants such as Rio Tinto, Anglo American PLC and Glencore.

An important sign of these companies' renewed health is their falling debt load. As of June, BHP, Rio Tinto, Anglo and Glencore collectively held net debt of about $44 billion, down about 50% from the end of 2014, according to a review of their earnings reports.

Continue Reading Below

It's a dramatic shift from two years ago, when the mining industry was reeling. Slowing Chinese growth had sent commodity prices sharply lower. Miners loaded up with debt cut dividends as their share prices sank.

But a surprise rally in the past year in major commodities such as copper, iron ore and coal has been a windfall, bringing in much needed cash, breathing new life into the beleaguered industry and sparking a rally in mining stocks. The S&P 500 Metals & Mining index has doubled since bottoming in January 2016.

The question for investors is whether miners will continue to pay down debt -- and boost dividends -- or, lured by rising commodity prices, return to the big-spending ways that got them into trouble two years ago.

Paul Gait, a Bernstein mining-industry analyst, said the rally has returned companies to the financial position they held before the commodity-price bust but not further. That suggests the companies remain shellshocked after the share-price collapse two years ago and are unlikely to launch aggressive spending plans any time soon.

"I don't think management wants to live through the volatility that we saw in the last few years and the near-death experience many of these companies saw," Mr. Gait said.

That is likely bullish for commodity prices in the long run, he said, since it means few new large-scale mines are likely to get started in the coming years, limiting the supply of materials like copper even as demand rises.

To be sure, other miners aren't standing still. Rio Tinto is plowing billions into a giant Mongolian copper mine and is moving ahead on a big bauxite and iron-ore project in Australia. BHP last week said it would spend $2.5 billion to extend the life of a copper mine in Chile.

But the trend marks a reverse from the so-called commodity supercycle, when surging prices fueled by seemingly bottomless demand in China encouraged miners' managements to splurge on new projects -- and the debt that funded them.

Hunter Hillcoat, a mining analyst at Investec Securities, says there is one exception to miners' more-cautious stance: Glencore. The Swiss mining giant has been more focused on deal-making than its competitors, inking a $1.1 billion deal in July for a stake in Australian coal assets and mulling a bid for $11 billion grain trader Bunge Ltd.

While Glencore has restored its dividend, returning $1 billion to shareholders in 2017, it didn't announce an increase in the payout in its latest earnings report this month as did BHP, Rio and Anglo American. Instead, the company, led by deal-making chief executive, Ivan Glasenberg, is looking for potential acquisitions.

That's fine with David Herro, fund manager for Harris Associates LP, which controls about 5% of Glencore's stock valued about $3 billion, according to FactSet. A year ago, Mr. Herro wanted Mr. Glasenberg to hold his fire on the deal-making front and focus on restoring the company's balance sheet after its faced down a share-price collapse in 2015.

That's changed.

"They are very astute deal makers," Mr. Herro said. "Whereas most managements tend to destroy value, I believe the Glencore management team typically creates value. I trust that they will do the right thing with the free cash flow."

Write to Scott Patterson at scott.patterson@wsj.com

LONDON -- The world's biggest miners are on a tear.

Fueled by a sharp rise in commodities prices, companies like BHP Billiton Ltd., Glencore PLC and Rio Tinto PLC are flush with cash again, boosting dividends, cutting debt and shelling out cash for expansion projects. Just a couple of years ago, they were scrambling to survive in the midst of a historic downturn.

The world's biggest mining company, BHP, reported Tuesday a net profit of $5.9 billion for the 12 months ended June 30. That is a sharp turnaround from the previous year's loss of $6.4 billion, when the company took big charges from U.S. oil-and-gas business and a fatal 2015 dam failure at an iron-ore operation in Brazil.

BHP boosted its annual dividend by 177% and said its net debt had fallen 38% from the previous year to $16.3 billion.

BHP's report caps a strong string of financial results for mining giants such as Rio Tinto, Anglo American PLC and Glencore.

An important sign of these companies' renewed health is their falling debt load. As of June, BHP, Rio Tinto, Anglo and Glencore collectively held net debt of about $44 billion, down about 50% from the end of 2014, according to a review of their earnings reports.

It's a dramatic shift from two years ago, when the mining industry was reeling. Slowing Chinese growth had sent commodity prices sharply lower. Miners loaded up with debt and cut dividends as their share prices sank.

But a surprise rally in the past year in major commodities such as copper, iron ore and coal has been a windfall, bringing in much needed cash, breathing new life into the beleaguered industry and sparking a rally in mining stocks. The S&P 500 Metals & Mining index has doubled since bottoming in January 2016.

The question for investors is whether miners will continue to pay down debt -- and boost dividends -- or, lured by rising commodity prices, return to the big-spending ways that got them into trouble two years ago.

Paul Gait, a Bernstein mining-industry analyst, said the rally has returned companies to the financial position they held before the commodity-price bust but not further. That suggests the companies remain shellshocked after the share-price collapse two years ago and are unlikely to launch aggressive spending plans any time soon.

"I don't think management wants to live through the volatility that we saw in the last few years and the near-death experience many of these companies saw," Mr. Gait said.

That is likely bullish for commodity prices in the long run, he said, since it means few new large-scale mines are likely to get started in the coming years, limiting the supply of materials like copper even as demand rises.

To be sure, other miners aren't standing still. Rio Tinto is plowing billions into a giant Mongolian copper mine and is moving ahead on a big bauxite and iron-ore project in Australia. BHP last week said it would spend $2.5 billion to extend the life of a copper mine in Chile.

Indeed, copper and a byproduct of copper mining, cobalt, have become darlings of the industry as miners position themselves for what many describe as the next wave of development in China and other industrializing countries. Such countries are likely to scale back demand for bulk commodities such as iron ore and coal, used in steel making, and shift to copper, used in electric grids and consumer products such as washing machines and cars. Cobalt is a key ingredient in lithium-ion batteries that power mobile phones and electric vehicles.

"We should see strength in demand for those commodities as economies grow toward the later cycle," Glencore Chief Executive Ivan Glasenberg said on a recent conference call.

The trend away from developing so-called greenfield mines marks a reverse from the so-called commodity supercycle, when surging prices fueled by seemingly bottomless demand in China encouraged miners' managements to splurge on new projects -- and the debt that funded them. BHP in 2011, which posted a record $24 billion in net profit, had plans to invest $20 billion in major projects and exploration over the following year, and more than $80 billion by 2015. Rio planned to invest $14 billion in new projects in 2012.

Hunter Hillcoat, a mining analyst at Investec Securities, says there is one exception to miners' more-cautious stance: Glencore. The Swiss mining giant has been more focused on deal-making than its competitors, inking a $1.1 billion deal in July for a stake in Australian coal assets and mulling a bid for $11 billion grain trader Bunge Ltd.

While Glencore has restored its dividend, returning $1 billion to shareholders in 2017, it didn't announce an increase in the payout in its latest earnings report this month as did BHP and Rio. Anglo American surprised investors by reinstating the dividend after having suspended it in 2015.

That's fine with David Herro, fund manager for Harris Associates LP, which controls about 5% of Glencore's stock valued about $3 billion, according to FactSet. A year ago, Mr. Herro wanted Mr. Glasenberg to hold his fire on the deal-making front and focus on restoring the company's balance sheet after its faced down a share-price collapse in 2015.

That's changed.

"They are very astute deal makers," Mr. Herro said.

Write to Scott Patterson at scott.patterson@wsj.com

(END) Dow Jones Newswires

August 22, 2017 12:05 ET (16:05 GMT)