Miners, Once Dividend Darlings, Strike Vein Of Austerity
13 February 2016 - 7:02PM
Dow Jones News
(FROM THE WALL STREET JOURNAL 2/13/16)
By Juliet Samuel
A dividend cut this week by one of the world's biggest mining
companies brought home a new reality for investors: Mining stocks
can no longer be counted on for income.
Rio Tinto, the Anglo-Australian miner, on Thursday scrapped its
long-standing promise to maintain or increase its dividend every
year and adopted a more flexible policy of tailoring its payout to
circumstances.
The move surprised investors, coming from a company once seen as
one of the mining industry's simplest, steadiest and biggest
operators. Rio Tinto's shares fell Thursday but bounced back in a
rally Friday, up 8.4% in London.
Andrew Lapping, deputy chief investment officer of South
Africa-based fund Allan Gray, said it should never have become
normal for companies in a highly cyclical industry like mining to
promise an ever-increasing, or "progressive," dividend.
"The whole progressive dividend was an absolute joke," Mr.
Lapping said. In a deteriorating market environment, he said, "all
you're doing is borrowing from the banks and giving to
shareholders."
He said the concept, which was meant to instill capital
discipline, has been firmly discredited by years of overinvestment
and expensive acquisitions across the industry.
David Cumming, head of equities at Standard Life PLC, said
holding mining shares is now a waiting game. "It doesn't really
matter that it's not a dividend story anymore because the stocks
are all down [so much]. It's more about are we going to make any
money out of this again?" he said. Standard Life is a major
shareholder in several large mining companies, including Rio
Tinto.
Rio Tinto is just the latest mining company to decide it can no
longer afford a generous payment to its shareholders. The industry
is suffering a hangover from years of heavy investment spurred by
low interest rates and the excitement sparked by surging Chinese
demand. Since the turn of the decade, companies have built a
generation of supermines around the world, pushing up
production.
But as China's economy slowed, the new capacity has sent
commodity prices tumbling, eating into what used to be some of the
richest dividends available. Freeport McMoRan Inc., Glencore PLC,
Cliffs Natural Resources Inc., Peabody Energy Corp. and Vale SA
have all cut dividends. BHP Billiton, one of Rio's main rivals, is
expected to follow.
BHP and Rio Tinto are among the most widely held mining stocks
among dividend funds, according to Liberum Capital analyst Ben
Davis.
Investors have generally been supportive of the dividend cuts,
as long as mining companies don't use the cash they retain to keep
expanding production. Most have scrapped ambitious expansion plans,
putting on ice billions of dollars of extensions and new mining
projects and instead paying down debt.
One major mining company CEO said he is content to wait out the
drought, until weaker competitors fail, supply comes out of the
market, and prices go back up.
(END) Dow Jones Newswires
February 13, 2016 02:47 ET (07:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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