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Miners are churning out more and more dividends
Very large dividend hikes have been a common theme this year in the mining industry. This is somewhat unusual behaviour for the sector.
I believe you should enjoy the juicy dividends while they last as historically miners have preferred to spend their money on growth projects rather than cash returns. Longer term, you should invest in this sector principally for capital gains.
BHP Billiton (BLT) this week lifted its shareholder payment by 150% after reporting a bumper half year profit. Acacia Mining (ACA), Centamin (CEY) and Randgold Resources (RRS) recently boosted their dividends by a large amount.
Why are they so generous?
Many miners are benefitting from higher selling prices and stronger balance sheets after several years of asset sales, cost optimisation projects and low investment spend.
Miners have previously been generous with dividends during times of lower commodity prices, paying shareholders to wait for the next uptick in the price cycle.
Once commodity prices start their ascent, the focus tends to shift to investing in new projects. We’re arguably in the uptick cycle now.
Shareholder value could have been created by investing in the low point of the cycle when asset prices were cheap. Few companies were brave enough to take the plunge when investors wanted to see balance sheets repaired after years of excessive spending.
The sector was spectacularly burnt four to five years ago when commodity prices crashed. Companies had overpaid for assets that were only economic at high commodity prices. Miners were left with projects that destroyed, not created, value.
Why is everything different now?
The aggressive growth pursuit mistake seems to still be at the forefront of their memory, hence why you haven’t seen lots of takeovers or big capital expenditure projects.
Investment bank Investec believes miners will now focus more on creating value than chasing high production volumes, in order to avoid being left with unsold inventory. That could mean restricting supplies temporarily if it helps to stabilise or strengthen selling prices. Investec also reckons miners will continue to prioritise net debt reduction and not chase M&A.
If this turns out correct, miners may continue to increase capital returns and in turn make the sector more attractive for income seekers.
‘Above all, the mining industry has now got some time to think about the future, rather than simply focus on ensuring its own survival,’ says the investment bank, commenting on the benefits of higher commodity prices over the past year.
Sylvania Platinum’s dividend conundrum
Have you seen Sylvania Platinum’s (SLP:AIM) share price recently? It is up 75% year to date. Its core business is doing very well, generating lots of cash and profit is rising.
Costs are coming down, it has no debt and there is a large cash pile in the bank. So why doesn’t it pay dividends? They are on the agenda; but not this year, says boss Terry McConnachie.
It has 300 individuals in Australia with fewer than 2,000 shares each in the company, having not disposed of them when Sylvania cancelled its stock exchange listing in that country.
McConnachie says it would cost them more in fees to collect the dividends than they’d get from the cash payments. Therefore the miner is looking at ways to buy their shares and clean up the shareholder register before it starts paying dividends. (DC)