Mining companies globally are making money hand over fist.
Times have never been better. Every time that a global mining house announces its results, the constant and recurring themes nowadays include declaring record profits, share buy-backs and special dividends in addition to the regular ones. If you are a shareholder in any of the 40 largest mining companies in the world there is a very good chance that you have been smiling all the way to the bank from the financial results of your company recently. Times are different from what they were just after the Great Recession in 2008 when commodity prices worldwide followed the trend of the global economy. The most prominent feature of this era is when the indomitable Anglo American then made the very unpopular decision to forego its dividend in 2009.
Commodity prices right across the board have made a strong resurgence in the last few years and this has left resource companies with excess cash on their balance sheets. Executives at these entities have been happy to either deleverage their balance sheets and/or return the excess cash to—in some cases long-suffering—shareholders. However, although it is good that these companies are generating exceptional returns for their shareholders, lingering questions and concerns may be on the minds of their prospective investors. For example, is the sector now too hot for investors to buy shares of the top 40 global miners? Has the sector reached the top of the market and should investors be wary of a coming correction that could cost them their wealth?
What is in store for the future of commodities? Will the sector run out of steam soon and see prices slowing down or softening? What should investors deduce from the signals that the various management teams of these companies buy paying out record dividends and share repurchases? A practical financial theorist will be pleased with a company generating superior returns but will be wary that when a company starts to throw off cash is it a signal to say that these companies have run out of investment opportunities to deploy the free cash flow they are generating?
It is not too late for investors to consider adding some exposure to the mining space in their investment portfolios. There is plenty of scope for further value appreciation now and going forward. Reports by accounting firms Price Waterhouse Coopers (PWC) and KPMG assert that the mining sector is one of the few that have successfully weathered the perfect storm brought on by the COVID-19 pandemic and came out of it unscathed. The mining sector has thrived in the same period. Over the period covering March 2020 to April 2021 this is how the global mining space fared:
PWC published its report on the mining & commodities sector in June titled Mine 2021 Great Expectations, Seizing Tomorrow which covered the financial performance of the largest mining companies in the world, the context of their performance and what investors can expect going into the future. The report makes some very interesting findings chief among them that the companies that made environmentally sustainable goals (ESG) a major part of their strategy were much more likely to raise finance for their projects on the capital markets much more than those which did not consider ESG.
What is most striking from this report is that if an investor had invested in a portfolio of shares that comprise the 40 largest mining companies in the world from March 2020 and held on to it as is up until April 2021 that investor would not only have booked a 64% return but would have also outperformed all of the major markets of the world. All of the major stock exchanges of the world: the Toronto Stock Exchange (TSX), the Australian Stock Exchange (ASX), the New York Stock Exchange (S&P 500) and the London Stock Exchange (FTSE 350) represented by their composite indices lagged the performance of the collective global mining companies. The global mining sector should therefore be on the radar of every investor seeking to optimize their portfolio returns. The sector, as will be shown later, is not slowing down. It still has plenty of steam in it.
Forty of the largest mining companies in the world enjoyed a 64% lift in their collective market capitalization to US$1.46 trillion. Their collective revenues were also up by 4% to US$545 billion. Net profits during the same period were up 15% to US$70 billion. Copper, it is interesting to note, contributed the most to mining company revenues. In purely financial terms copper was responsible for US$122 billion in revenues.
Investment Case: Glencore PLC
Glencore plc is a leading integrated producer and marketer of commodities, operating around the world. The group’s commodities comprise of metals and minerals, energy products and agricultural products. This commodities juggernaut on the 5th of August unveiled plans to buy back US$650 million of its shares in addition to a special dividend of US$500 million. These two pay-outs take the total disbursements to shareholders for the 6-month period under review to US$2.8 billion. Other specifics of the pay-out include US$1.6 billion that the company agreed to pay in terms of its US$1 billion dividends plus 25% of free cash flow from its industrial assets policy. The company’s CFO considered this quantum to be conservative. In the second half of its financial year, the company expects to earn from its coal business on the back of improved coal prices. The CFO, during the presentation of the results, made a bold and emphatic statement to the effect that: “This won’t be the last record interim earning.”
This the company’s chief executive described as the start of elevated returns from the company’s industrial assets. This upbeat tone and sentiment about Glencore’s performance was attributed by the company’s top brass to fiscal and monetary stimulus, successful vaccine roll-outs and increasing momentum in relation to the decarbonisation of energy systems. This is envisaged to continue to underpin sector sentiment going forward.
Glencore reported earnings before interest tax, depreciation, and amortisation (EBITDA) of US$8.7 billion which is up 79% from the previous year. The company’s industrial mines contributed US$6.6 billion of the overall EBITDA figure which on its own was a whopping 152% of the previous year’s contribution. This impressive financial performance enabled the company to reduce the debt on its balance sheet by a third. Glencore shareholders are in danger of becoming seriously rich if they aren’t already. The same fate awaits every prospective investor in this company and the mining sector.
EBITDA from coal is expected to come in at US$5.9 billion for the full year compared to the US$912 million in the first half. Goldman Sachs, the US investment bank is of the view that Glencore has the scope to enhance its returns given its reduced net debt position. The company went on to state that it expects to generate an EBITDA of US$21.8 billion.
Investment Case: Anglo American
Anglo American is a leading global mining company, with a world-class portfolio of mining and processing operations and undeveloped resources, with more than 95,000 people working for it around the world, in 15 countries. This company on the 29th of July announced its intention to disburse an additional US$2 billion to its shareholders through what it described as an on-market irrevocable and non-discretionary share buyback programme of $1 billion together with a special dividend of $0.80 per ordinary share, equal to $1 billion. All in all, the company intends to return at least US$4 billion in cash to its shareholders when what the company describes as its base dividend of US$4.1 billion is considered.
Anglo American will repurchase up to 204.3 million shares in terms of the buy-back programme that started August 12 and ending no later than 14 February 2022. The US$2.1 billion ordinary dividends is being paid out of an interim attributable profit of $5.2bn. Compared to $471m in interim profit in 2020, that is a staggering year-on-year improvement of just over 1000%.
The total pay-out is 77% of interim earnings. Earnings per share totalled $4.30/share of which $3.31 per share was paid out in dividends and the share buy-back. Earnings before interest, tax, depreciation and amortisation (EBITDA) totalled $12.1 billion, a record, said Mark Cutifani, CEO of Anglo American. “I have three words to describe these results: breadth, depth, and diversity.”
The company attributed its good performance to what it called a “pretty good market” in the platinum group metals space (PGMs), iron ore, and copper spaces in addition to an improvement at DeBeers. The company booked US$12.1 billion in EBITDA and of that figure US$7.9 billion was driven by prices that were 62% higher than what they were in the first half of 2020. The company recorded notable improvements in its operations right across its portfolio of businesses that include Kumba Iron Ore, Minas Rio and Anglo Platinum which contributed US$4.9 billion and US$4.38 billion to EBITDA respectively.
In the same fashion as Glencore, Anglo American has been steadily deleveraging its balance sheet using the windfall of cash flows brought on by the improved commodity prices. As of June 30, net debt totalled $2 billion, a reduction of $3.5 billion during the six month period as a result of attributable free cash flow of US$5.4 billion. Net debt is 0.1x of annualised underlying EBITDA at the end of June.
Stellar as these results may be the chief executive of Anglo American mused that in comparison to its peers Glencore, BHP Billiton and Rio Tinto he expects his company to improve its financial performance going forward. The company expects to grow the volume of its copper business by 20% over the next three years. Anglo American’s boss expects that the best of its performance is yet to come.
Investment Case: Rio Tinto
Rio Tinto Group is an Anglo-Australian multinational and the world’s second-largest metals and mining corporation, after BHP, producing iron ore, copper, diamonds, gold, and uranium. The company was founded in 1873, when a multinational consortium of investors purchased a mine complex on the Rio Tinto, in Huelva, Spain, from the Spanish government. Since then, the company has grown through a long series of mergers and acquisitions to place itself among the world leaders in the production of many commodities, including aluminium, iron ore, copper, uranium, and diamonds. Although primarily focused on the extraction of minerals, Rio Tinto also has significant operations in refining, particularly for refining bauxite and iron ore. Rio Tinto has joint head offices in London and Melbourne. Rio Tinto is a dual-listed company traded on both the London Stock Exchange, where it is a component of the FTSE 100 Index, and the Australian Securities Exchange, where it is a component of the S&P/ASX 200 index. Additionally, American Depositary Shares of Rio Tinto’s British branch is traded on the New York Stock Exchange, giving it listings on a total of three major stock exchanges.
This company has not been an exception; it also racked up record earnings for the six months ending in June. It reported its earning on the 27th of July and its chief executive Jacob Stausholm remarked that the basis of the company’s performance was, “Government stimulus in response to ongoing COVID-19 pressures has driven strong demand for our products at a time of constrained supply resulting in a significant spike in most prices. We focused on safely running our world-class assets and supplying products to our customers. This enabled us, despite operational challenges, to deliver record financial results with free cash flow of US$10.2 billion and underlying earnings of US$12.2 billion, after taxes and government royalties of US$7.3 billion.”
Rio Tinto generated US$13.6 billion in cash which was 143% up from the same period in 2020 attributable to higher iron ore, copper, and aluminium prices. The company paid a total of US$6.4 billion to shareholders in the last six months in ordinary and special dividends. The company was further reported by Bloomberg to have declared a massive US$9.1 billion dividend to its shareholders. Rio Tinto like its peers Anglo and Glencore also used its excess cash flow to reduce debt by US$3.8 billion. These dividend payments have exceeded analyst expectations and will soon be reflected in an appreciating share price not only for Rio but also its peers.
What is it that has given steam to the performance of global mining houses and the licence to print money the way they have in the last six months?
The most obvious answer is what all the executives in the cases presented have said: rising commodity prices. Commodity prices are rising based on increased demand for basic materials. This is the second time in two decades that the world is experiencing a commodities boom. The first notable boom was from 2000-2008 and was driven primarily by China’s mass urbanization. The Asian country during that time seemed to have an unlimited appetite for basic materials. This appetite is starting to wane. The next source of demand for commodities will be the United States which on 10th August passed a staggering US$1.1 trillion infrastructure bill. This bill specifies what that country will be spending on public works. In summary the expenditures will be as follows: $550 billion in new spending, which will address core infrastructure needs, including $110 billion in new funds for roads and bridges, $66 billion for rail, $7.5 billion to build out electric vehicle charging stations, $17 billion for ports, $25 billion for airports, $55 billion for clean drinking water, a $65 billion investment in high-speed internet and more. Public works require basic materials which the top 40 global mining companies captioned below will be happy to supply. The United States is also not the only country where infrastructure spending will be taking place. There will be other nations and the net effect will be the same: higher demand for commodities and higher demand equals higher prices.
These three companies Glencore, Anglo American and Rio Tinto are a small sample of the 40 largest companies in the global mining sector. They are an apt reflection of not only the times but also what an investor can expect from mining companies operating globally. Investors should look out for the following themes going forward: increased earnings, cash flow, increased and record dividend payments and reduced debt on company balance sheets. For the foreseeable future, the mining sector is going to be a critical area for portfolio optimization. Investors looking to get rich should literally buy a mine or at the very least, buy shares in one!