Miners Choose Dividends Over Investments Despite Production Strain

Last year was spectacular for mining groups as they benefited from a postpandemic recovery in demand which boosted the prices of commodities such as coal, iron ore, aluminum and copper. Earnings soared as a result, and much of it went into shareholders’ pockets.

BHP Group Ltd., for instance, generated operating cash flow of $27.2 billion and distributed record dividends of $15.2 billion in the fiscal year ended June 30, 2021. Similarly, Anglo-Australian peer Rio Tinto PLC reported operating cash flow of $25.3 billion for 2021 and a full-year dividend of $16.8 billion.

However, investment is rising more slowly.

According to FactSet data on the world’s big four diversified miners–Anglo American PLC, BHP, Rio Tinto and Glencore PLC–capital expenditure relative to cash generation has been shrinking in recent years. The average capex-to-operating cash flow ratio across these four companies fell to 43% in 2017-21 from 78% in 2012-16, and analysts polled by FactSet expected it to decline further in 2022-24 to 34%.

On the other hand, the dividend per share as a percentage of cash flow per share across the four companies is expected to rise to 44% in 2022-24 from 40% in the last five years, which was already up significantly from 22% in 2012-16.

Last month, Jefferies said in a report that mining capital expenditure remains at “recessionary lows” despite the significant increase in prices. The U.S. bank said this has been caused by heightened geopolitical risk, the recognition that supply growth kills prices, and pressure from shareholders to use cash for capital returns rather than growth.

“Mine supply will fall short of demand unless demand craters. Even when the industry does ramp up investment in growth, the long lead time to bring capacity online will be an issue, and market deficits will likely persist for years as a result,” Jefferies said.

Annual mining capex growth could average up to 20% over…

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