Profit boom puts pressure on miners to hand back cash

By @ibtimes on

Top global miners are set to report a doubling in profits for the December half, thanks to booming iron ore and copper sales, sparking calls for fat cash returns to shareholders as the major miners run out of takeover opportunities.

BHP Billiton , Rio Tinto , Anglo American and Xstrata are due to report their December-half results over the next two weeks.

The big miners are so flush with cash that even their multi-billion dollar expansion projects and smaller acquisitions, such as Rio Tinto's $3.9 billion bid for Mozambique coal miner Riversdale , will not soak it all up.

Capex is back to all-time highs, gearing is approaching all-time lows, free cash flow yields are close to double figures, yet payout ratios and dividend yields are at 10-year lows. Something must give, Credit Suisse analysts said in a note this week.

Brazil's Vale set the ball rolling by promising to increase its dividends this year by 60 percent to at least $4 billion.

The main headwinds facing the miners are escalating labor, materials and energy costs hitting operations and expansion projects.

They have already flagged that recovery from devastating floods in Australia, which hit coal mines and coal rail lines, could take several months.

There is also continued uncertainty over the final shape of a mining tax on coal and iron ore profits in Australia.

Those factors, along with potential takeover opportunities, could lead the miners to disappoint investors holding out for big increases in dividends or share buybacks.

BHP BILLITON

BHP, the world's biggest miner, is tipped to report a first-half attributable net profit before one-offs of $10.3 billion, up from $5.7 billion a year ago when it reports on February 16.

After failing on three major deals in two years, including its $39 billion bid for Potash Corp , investors are clamoring for the company to return cash through buybacks, but the company is still looking for acquisitions.

It has flagged it wants to expand its petroleum assets, and most expect it to be eyeing companies like Woodside Petroleum in Australia or companies with Gulf of Mexico assets, like Anadarko Petroleum or Apache Corp .

If there's a fantastic acquisition, I wouldn't say: 'Don't do it.' But to me it wasn't clear that buying Potash gave a better return than buying back their shares -- certainly not on a near to medium term view, said Warwick Cumming, deputy head of equities at Tyndall Investment Management.

He has consistently told BHP over the past year it should launch an off-market buyback of its Australian-listed shares, in tandem with the ongoing $4.2 billion buyback of its UK-listed shares.

Citi estimates BHP could return $16 billion to shareholders this year and still have cash for growth. Morgan Stanley thinks it could return as much as $25 billion through buybacks of its shares in Australia and London.

RIO TINTO

Rio Tinto is expected to report a net profit of $8.2 billion for the December half, up from $3.7 billion a year earlier, according to Thomson Reuters I/B/E/S, when it reports on February 10. The consensus for full year 2010 is $13.97 billion.

Both companies have a good chance of beating consensus, Morgan Stanley analyst Craig Campbell said of BHP and Rio, as he sees them having boosted sales of iron ore at soaring spot prices, rather than on quarterly contracts, in late 2010.

With Rio having paid down most of its crippling $40 billion debt from its takeover of Alcan in 2007, analysts expect it to focus on its bid for Riversdale and development of the Oyu Tolgoi mine in Mongolia, with its eyes on a full takeover of its partner Ivanhoe Mines .

The company is expected to increase its final dividend to at least 48 cents, but analysts say it is likely to wait until its result in August before considering returning any spare cash to shareholders.

ANGLO AMERICAN

Anglo American is expected to report that full-year net profit doubled to $4.98 billion, according to Thomson Reuters I/B/E/S, when it announces results on February 18.

Copper and iron ore are the biggest earnings contributor for Anglo American. The company, unlike many of its rivals, does not break out its production figures ahead of its interim and full-year results.

Liberum Capital estimates Anglo American's exposure to Queensland coal as a percentage of total 2011 earnings at 8 percent, compared with Xstrata at 16 percent, BHP at 10 percent and Rio Tinto at 3 percent.

Queensland has been hit by severe flooding and a huge cyclone in the past month.

XSTRATA

Xstrata is expected to post an almost 90 percent surge in full-year net profit to $5.19 billion, according to Thomson Reuters I/B/E/S based on forecasts when it reports its results on February 8.

The results will be boosted by higher commodity prices --particularly for copper, nickel, and ferrochrome -- even as production declined for some commodities.

We expect that Xstrata's management will be anxious to provide a positive message to the market in anticipation of Glencore's likely IPO later this year, said Paul Galloway, analyst at Bernstein Research.

Xstrata has coal, copper and zinc operations in Queensland, and an update on the effect of recent floods is keenly anticipated.

(Reporting by Sonali Paul and Julie Crust; Editing by Vinu Pilakkott)

Join the Discussion