Investors in the big miners are enjoying a “golden age” of shareholder returns, but with asset sales playing a big role in the record distributions, investors are split over how sustainable the trend is.
BHP and Rio Tinto will return a combined total of $US14 billion ($19 billion) of asset sale proceeds to shareholders over the next six months, and that bonanza will come in addition to record dividends and share buybacks from the assets that will be retained.
The three largest interim dividends in Rio’s history have been paid within the past four years, and with large pure-play miners like Newcrest and Whitehaven also breaking dividend droughts in recent years, it seems the investment phase and the production phase of the mining boom has finally turned into a third phase where investors get their rewards.
Plato Investment Management managing director Don Hamson said investors should enjoy this “golden age” of shareholder returns because it was not realistic to expect the recent scale of asset sales to continue longer term.
“I think Rio and BHP got the message about ‘don’t blow too much on capex, return as much as you can to shareholders’, so it is a golden age at the moment,” he said.
“If you can pay those sorts of dividends out, they can be almost a cash cow, maybe they can make up for Telstra.
“But I don’t think it is realistic that they can do that (sell assets and return proceeds to shareholders) every year for the next five years, the fact BHP say they are near their ‘dream portfolio’, I don’t think you can expect a big capital management event each year from asset sales,” he said.
But two other investors said the scale of BHP and Rio’s portfolios meant it was feasible for the companies to make regular asset sales into the future while developing new assets to take their place.
“I don’t think it is a process that ends… as a business you are constantly going to be looking over your portfolio and making sure that it is the right portfolio for you,” said Camille Simeon, an investment manager at Aberdeen Standard Investments.
“The macro landscape is constantly changing, so I would expect for management that should be an ongoing process.”
Pendal Group’s Brenton Saunders agreed, saying it was “natural for a tier one mining company to have that continual portfolio renewal”.
While BHP have recently signalled their six year campaign of assets sales has left it close to its “dream portfolio”, Rio chief executive Jean-Sebastien Jacques said last week there were still non-core assets in his portfolio, suggesting more asset sales were likely.
While the two companies’ recent asset sales (BHP’s US shale divestment and Rio’s coal divestments) have seen them exit entire sectors or commodity groups, Mr Saunders pointed out that it often made sense to sell assets in commodity sectors that were considered core to the company.
BHP’s recent attempts to sell its Bass Strait oil and gas assets and its successful sale of the Cerro Colorado copper mine are good examples, while Rio has sought to sell its exposure to the Grasberg copper mine despite wanting to grow its exposure to the red metal.
“Portfolio renewal is about selling older, more mature assets and trying to replace them with newer, easier to manage, lower-on-the-cost curve assets, they both have done that in their own ways,” he said.
“Rio have done it asset by asset in quite a piecemeal, methodical way over a long period of time, BHP did it in a big boom way with South32 and got rid of all those assets that were becoming either less relevant to the earnings mix or becoming more difficult to manage.”
But Mr Saunders said the strategy of selling assets to bolster shareholder returns was not without its risks.
“The asset base is smaller which shrinks their earnings base, so whilst it puts the portfolio in a much leaner and meaner format, it does mean that growing profits from here is harder. Growing returns on capital is easier because they have been shelving off the assets they feel are challenging,” he said.
“Rio are becoming more and more of a one-trick pony where their portfolio is now very exposed to iron ore, in this past result out of $US5 billion of operating cashflow, iron ore made about $US4 billion of it. Whereas BHP has a range of businesses that are doing reasonably well and making reasonable contributions to earnings.”