THE only way the mining sector can secure a re-rating would be to bring back the progressive dividend, said Capital Group partner and investment analyst, Douglas Upton.
In abandoning the progressive dividend, mining firms had acknowledged they couldn’t handle market volatility and therefore had “put it all on to shareholders”.
BHP and Rio Tinto cut their progressive dividend policies in 2016 as they sought to reduce debt, arguing they intended to deliver stable shareholder returns. At the time, however, the move attracted negative criticism.
“We believe this was an overreaction by management that alienated a group of shareholders and potential shareholders who sought yield,” said an analyst at the time. That view still holds.
“If you look at what they’re saying it’s: ‘We can’t handle the volatility’,” said Upton. Mining company profits tended to vary whilst dividends were “all over the place”.
“So they not only put the share volatility on to the shareholders, they put all the volatility on to the shareholders,” he said.
Valuations of mining firms were constrained by the difficulty of anticipating how demand from China would develop. China is enormously influential in commodity markets as consumer and producer. It is the world’s largest producer of refined copper and steel and imports about two-thirds of all iron ore. It also had a 50% of the world’s base metals market last year, according to Bloomberg Intelligence.
George Cheverley, a portfolio manager for Ninety One in London, has a more optimistic view of the sector. He said mining companies could be “going back to where BHP was heading many years ago”.
“They do have an opportunity to go where they were in the past which is actually being sensible about capital allocation, paying good dividends, as well as keeping enough to maintain and sustain their businesses,” he said. “And this pandemic is showing they have a solid base. After some bad years.”
Dividend payments by the mining sector’s 40 most valuable companies increased to $55bn in 2019, a year-on-year increase, according to a June study by PwC, a market consultancy. However, it estimated a 6% decline in earnings before interest, tax, depreciation and amortisation for this year owing to the impact of the Covid-19 pandemic.
“The idea of a re-rating of the mines sector … I just can’t see how it works,” said Upton. “The big problem is a lack of visibility over the revenues and the earnings streams of the companies.
“This has always been the case and like a lot of people could make a case that commodity price is just a random walk.”
“I would really like to see companies with good quality assets that can sustain it, get a strong balance sheet, get back to a progressive dividend, and that’s the one thing I’ve seen that companies might be able to do,” said Upton.