Share Name Share Symbol Market Type Share ISIN Share Description
Bhp Group Plc LSE:BHP London Ordinary Share GB00BH0P3Z91 ORD $0.50
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  -24.60 -1.24% 1,955.20 1,954.80 1,955.60 1,969.20 1,944.40 1,944.40 1,755,457 15:31:05
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Mining 43,970.7 17,786.5 161.6 12.0 41,295

As the Pandemic Broke Out, UK Miners Paid Out

05/03/2021 11:22am

Dow Jones News

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From Oct 2020 to Oct 2021

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By Adriano Marchese 

Among the heavyweights of U.K. business, blue-chip miners were the jewel in the crown for investors last year. As 2020 drew to a close, the FTSE 100's biggest miners paid out hefty dividends -- some even distributing record-high payouts -- in a time when the coronavirus tore through global economies.

BHP Group PLC, the world's largest listed miner by market share, declared a 55% increase in its interim dividend.

Rio Tinto PLC, the second-largest mining company, opted to pay $5 billion in dividends accompanied by a special payout of $1.5 billion to its investors for the year.

Meanwhile, Glencore PLC said it would resume dividends in 2021 after the company gave priority to lowering its debt below the $16 billion mark the previous year.

The success of the sector is the result of several factors coming to a head, according to AJ Bell's investment research director, Russ Mould. Namely, the promise of economic recovery lifting commodity prices and lowering debt profiles, and, for some, the need to repent for past profligate spending.

Spot Price Increase

First, 2020 saw a steep rise in commodities prices. In the past 12 months -- for almost as long as Covid-19 has been deemed a pandemic -- the price of copper rose nearly 61%, while the spot price of iron ore almost doubled to over $170.00 a metric ton. In 2021 alone, copper has risen 17%.

These higher prices helped buoy profits last year.

Riding the tailwinds of surging iron-ore prices, Rio Tinto -- which runs one of the world's biggest iron-ore export hubs -- beat expectations with a 20% increase in underlying earnings in 2020.

BHP's average realized price of iron ore rose 33% on year and 28% for copper, offsetting weaker prices for other commodities, including oil, and giving it the confidence to top up its investor returns.

In part, this is the result of demand for commodities far outpacing supply, and in no small part from China, which had gained control of the pandemic faster and earlier than most countries.

But demand isn't the only force driving prices.

Many central banks and governments have introduced record fiscal stimulus to keep economies afloat, leading investors -- specifically speculators -- to look at commodities with a different eye.

"Speculators flipped from selling to buying commodities more aggressively by mid-third quarter of 2020 and then again after the U.S. elections," Aakash Doshi, Citi's North America head of commodities research, said.

The Stuff of Speculators

According to U.S. bank Jefferies, the supply of copper won't be able to keep up with global demand projections.

"We are entering an extended period of strong demand growth combined with major supply constraints for some key commodities. Prices should go higher as a result," Jefferies said in a report.

For example, in 2021, global supply of refined copper is only expected to cover around 23.3 million metric tons out of a demand of 23.8 million tons -- leaving a deficit of about 453,000 tons. In five years' time, that deficit is expected to widen to 2.33 million tons, with demand from China expected to account for almost half of total demand.

This expanding deficit will only add more pressure to commodities prices going forward -- a profitable prospect for miners.

Herein lies an element of speculation for future prospects of continued generous dividends, Mr. Mould said. Though the economy in China is in the midst of rebuilding, those of Europe and the U.S. have yet to begin their own economic recovery in earnest.

For these countries, there is cautious optimism as the vaccine rollout across the world promises to usher a return to normality for hard-hit economies.

A Hint of Guilt

FTSE 100 miners are approaching their balance sheets with more discipline than in the late 2000s and early 2010s when miners set lofty merger-and-acquisition plans.

In 2010, BHP attempted to buy Potash Corporation of Canada in a hostile takeover bid, which ultimately floundered, while Rio Tinto's $38.1 billion acquisition of Montreal-based Alcan in 2007 raised fears of potential bankruptcy.

Mr. Mould suggests that new dividend levels from these companies could be a form of repenting for failed and imprudent mergers and acquisitions in the past.

Keeping Expectations in Check

Some analysts are heralding the coming of a new supercycle for the commodities sector -- a period of sharply rising prices as demand outpaces supply, causing wild volatility. Copper has been one such victim of this speculation.

The rise of electric vehicles and the great investment in renewable energy -- which isn't carbon intensive, but metal intensive -- make commodities a long-term story and, as other industries struggle, commodities are becoming more synonymous with growth.

On the other side of the debate, a more moderate case is made for the long-term play for commodities. As economies open and begin the process of rebuilding, demand will rise, but not necessarily in a supercycle, speculative frenzy.

"I wouldn't argue for a commodities supercycle [but I would] call the recent jump in commodities and that of 2021 as just a bull cycle or bullish environment for commodities," Mr. Doshi said.

As the world recovers from the pandemic, global trade will rebound, inflation will return slowly, and consumption in the U.S. and China will normalize, Mr. Doshi said.

Despite the positive signs, optimism for the near-term future sits on a tenuous perch. In many countries, vaccine delays and distribution issues have meant that fewer people than hoped have received their shots, while new, more contagious variants of the virus threaten vaccine efficaciousness.

A double dip in the global economy would harm miner profits, which would increase the burden of their debt and ultimately affect the ability to distribute cash, Mr. Mould said.

The pandemic will continue to pose a threat to not only record-breaking dividends, but healthy ones as well, he added.

Under such a scenario -- one that is quite possible given the flare-ups of new variants from the U.K., Africa and Latin America -- the burden of debt could return and weigh on confidence such that it would be wiser, and perhaps necessary, to hold on to their cash.

Write to Adriano Marchese at adriano.marchese@wsj.com


(END) Dow Jones Newswires

March 05, 2021 06:07 ET (11:07 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.

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