How will Rio Tinto and its fellow miners spend their fortunes?
MINING is a business that likes to think big. Huge lorries, vast holes in the ground and, of late, massive profits. Such is the impact of China on the fortunes of the world’s mining giants that even in the lean times after the financial crisis struck, the companies remained decently profitable. Now many commodities are again hovering around record prices and as their results-reporting season begins, mining firm are set to look indecently profitable.
On February 10th Rio Tinto unveiled profits for 2010 of $14.3 billion, mainly a result of booming demand for iron ore, which accounted for around two-thirds of those earnings. In two weeks’ time Vale, a Brazilian mining giant that also leans heavily on iron ore, is likely to announce profits of $17 billion. A couple of days before Rio’s announcement Xstrata, the world’s biggest coal exporter, said that it had made some $5 billion. BHP Billiton, which relies for its profits on the most diverse set of minerals (including oil), reports its half-year figures on February 16th. These should set the company up for profits well in excess of $20 billion for the year to June 2011.
The good fortune shows no sign of ending. China’s economy is still rolling along at a fair lick and recovery in the rich world should perk up demand there too. Over the next two decades appetite for metals is likely to double as China and India urbanise and modernise. The big miners are ready to cash in. Capital spending is at an all-time high. Vale wants to pump over $20 billion a year into expanding production. In 2011 both Rio and BHP will probably spend $11 billion. But capital spending is limited by the availability of new or expandable older projects as well as the men and equipment to do the digging. So the mining giants will still be left sitting on big piles of cash.
All three have serious impediments to spending the money on acquisitions, not least the hotter competition for the world’s better assets from Chinese and Indian miners. Rio Tinto, in the throes of spending $3.8 billion on buying Riversdale, a coal producer with interests in Africa, is deeply scarred by its disastrous overpayment for Canada’s Alcan in 2007. The damage to its balance-sheet has only recently been repaired and it will now only consider smaller acquisitions. BHP’s recent rebuff by Canada’s government in its quest to buy PotashCorp and before that the collapse of an iron-ore joint venture with Rio, after regulators objected, show the difficulty of completing a mega-mining deal these days. And Brazil’s government, though only a small shareholder, can still exert pressure on Vale in other ways. It would probably not acquiesce to a big overseas takeover by the firm, preferring it to spend on creating jobs at home.
Investors, most notably BHP’s, have called for share buybacks or special dividends to hand the spare cash over to shareholders. Rio has responded by raising its dividend and announcing a buyback worth $5 billion over the next two years. In September last year Vale said it would return $3 billion this way. Some say that BHP may instead use its cash on another big deal, possibly in oil, where it is small enough for regulators not to feel obliged to intervene. It may fear that handing the money back to shareholders rather than seeking new investments in the biggest commodity boom the world has seen would regarded as an admission of failure. In all, the mining firms will find it tricky to strike the balance between satisfying shareholders’ short-term appetite for higher payouts and fulfilling their long-term hopes that the firms will continue to grow as fast as they are now.