Cash cows on the UK mining menu
British investors are focused on our top mining stocks, mainly for one reason.
Summary: A large delegation of Australian mining companies have just attended three major industry conferences in London, but the focus investors was clearly on our two biggest resources stocks.
Key take-out: BHP and Rio are under pressure to deliver income returns to investors. They are the stocks UK investors are most interested in. For other miners, securing UK capital will be an uphill battle.
British investors reckon it's time to treat Australia's biggest mining companies as cash cows, extracting as much in dividends as possible while delaying any major expansions or project reinvestment.
That was one of my main impressions gathered from a week attending three mining conferences in London last week, as well as speaking with fund managers and company executives.
An equally interesting picture emerged at the small end of the mining sector, where risk aversion was more obvious than in prior years, meaning that Australian explorers hoping to raise fresh capital in London are finding the mood unreceptive.
What worries British investors, who can be a major influence on the Australian stock market, is the uncertainty of a fragile government that might change if an early election is called next year, and the even greater uncertainty of the proposed British exit from Europe.
Australia's two biggest mining companies, BHP and Rio Tinto, have a major British shareholder base and profits earned from mining in Australia and elsewhere represent one of the most reliable sources of cash for British investors as political events unfold.
What that means for the big two is that they will be under pressure for the next year, at least, to shower rewards on shareholders, either in the form of increased dividends or share buybacks.
Evy Hambro, London-based head of the natural resources division of BlackRock, the world's biggest fund manager, told delegates to the Mines and Money conference last week that miners needed to “step up” dividend payments in order to win back the confidence of investors.
His message was that increased returns to shareholders now would put the miners in a better position for when they needed to return to the market to raise capital for new projects.
“I think there's a window of opportunity over the next 12-to-24 months; I hope it's at least 24 months, where we can get big money coming back,” Hambro said.
“We are already seeing share buybacks being announced and seeing dividends increase, and I think there's room for a lot more of that, and that will really help heal the relationship with investors.”
Hambro reminded his audience that in the resources boom of a decade ago mining companies wasted billion of dollars on unwise project developments and overpriced acquisitions, meaning that most miners failed to generate positive returns.
The overall mood of Mines and Money, which has traditionally been London's major mining conference, was cautious. Numbers attending were down, as were companies exhibiting and presenting.
At the rival 121 Mining Investment conference (where company managers face off with individual investors) there was a similar restrained atmosphere, which did little to improve the share prices of the 24 small Australian companies represented.
Easily the biggest contingent of the 73 companies at the 121 event, the high level of Australian attendance reflected an earlier time when London investors had a greater appetite for risk.
But a share price check in the days after 121 showed that little was achieved, with stocks such as Lithium Australia slipping from 21 cents to 17c. Greenland Minerals and Energy, a uranium stock, easing from 11c to 9.4c, and Cardinal Resources, a gold explorer, sliding from 60.5c to 57c.
Some stocks did benefit from their London outing. St George Mining, which has made what looks to be a significant discovery of nickel and copper in WA, enjoyed a 12c share price uplift to 48c immediately after the two-day 121 conference, but has since slipped back to around 40c.
For Australian companies planning to list on the London Stock Exchange, such as potash project developer Danakali, and Resolute, a goldminer, the challenge will be in generating sufficient investor interest to justify the cost of listing.
Political uncertainty and bruised investor confidence mentioned by Hambro are two reasons for London being a less receptive place for Australian mining companies, with a third and perhaps more important reason being concern about the prospects of a major stock market correction.
Mispriced risk raises alarm
Neil Woodford, one of Britain's top fund managers, was the latest to sound the alarm when he warned late last week that he was worried about an asset-value bubble forming that was potentially bigger than that before the 2008 crash.
What particularly concerned Woodford was what he believed was the mispricing of risk.
“Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations,” Woodford told the Financial Times newspaper.
“Whether its Bitcoin going through $US10,000, European junk bonds yielding less than US treasuries, historic low levels of volatility, or triple-leveraged exchange-traded funds attracting gigantic inflows, there are so many lights flashing red that I am losing count.”
The irony of the uncertainty evident in London's financial community as political events unfold is that Australia's major mining stocks, with their improved balance sheets and strong cash flows, represent one of the more assured sources of dividend income, especially if the temptation to expand is resisted.
Those conditions should suit investors in big miners such as BHP and Rio Tinto.
Smaller mining stocks will find conditions more difficult, with London investors unlikely to be keen on risk until their home market and relationship with Europe is sorted out.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free
Join the Conversation...
There are comments posted so far.