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Aggressive cost cutting, volume growth and stable commodity prices will drive a rise in half-year profits for the world’s biggest miners, paving the way for healthy dividend hikes now and anticipated capital returns in 2015.
The latest round of results could tempt investors back into the sector, analysts say, after steering clear amid fears of cooling growth in China and a yet-to-occur slump in iron ore prices. Top miners BHP Billiton , Rio Tinto and Brazil’s Vale are expected to book solid growth in cash flows, having slammed the brakes on building new mines 18 months ago and embarked instead on massive cost cuts and debt repayments.
“Cash flows have been negative because they’ve been spending on projects and developments. You want to start to see a sign that that’s starting to reverse,” said Darko Kuzmanovic, a portfolio manager at Caledonia Investments in Sydney.
“Hopefully that’s the catalyst for people to be more comfortable with these names and start thinking about investing in them, because they don’t look particularly expensive.”
Expectations are growing that Rio Tinto, the first of the big five miners to report, will come up with the fattest dividend increase, as the company has said it would beat its target for $2 billion in cost cuts.
The most bullish analysts are looking for a 15 percent rise in Rio Tinto’s annual dividend to $1.92, compared with the consensus view for 8 percent growth to $1.81.
“In our view the company has leapfrogged the peer group to become the most shareholder friendly company of the large miners,” Credit Suisse said in a Feb. 3 note.
BHP Billiton, reporting its first-half results, may want to signal it is in the best position to launch a share buyback later this year, as cash flows surge on higher output of iron ore, copper and petroleum, lower operating costs and lower capital spending.
BHP typically holds its interim dividend steady or raises it one cent from its final dividend the previous year. However the consensus is for a 3 cent increase on the final dividend from last year to 62 cents, which would be 9 percent more than the first-half dividend last year, analysts said.
“The market’s getting more excited now because we’re 12 to 18 months into the austerity program. As balance sheets degear, the potential for returns goes up, and that’s where the market’s fixation is right now,” said UBS analyst Glyn Lawcock in Sydney.
For commodities trading giant and miner Glencore Xstrata , the key to rewarding shareholders will be the sale of its Las Bambas copper project in Peru, which it offered to sell to ease China’s concerns about its takeover of Xstrata.
Las Bambas is expected to fetch more than $5 billion if a sale goes ahead. However as the sale process drags on, with only one Chinese consortium led by Minmetals in the running, speculation has grown that Glencore may keep the mine.
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