Investors dig healthy returns despite mining sector losing its boom
Could that also be the case with Kevin Rudd's claim the mining boom is over?
His problem - all right, eventually ours since it will mean higher taxes at some point after the election - is that high commodity prices, which generated bumper mining profits, are on the wane. Consequently, so is the government's tax take.
More to the point, the mining investment boom that has been propping up economic growth is coming to a shuddering halt. You don't need me to tell you, especially when Treasurer Chris Bowen can, that lower economic growth drains tax revenues.
But it's quite a different story for investors. Although the investment boom lifted BHP Billiton shares by 50 per cent between mid-2008 and the start of 2011 and Rio Tinto's by 154 per cent, the surge didn't last.
BHP has since lost nearly all of that, while Rio has kept about two-thirds of its gains. The real legacy has been in an unexpected place: dividends. And they can only grow.
It's quite the novelty to even expect a dividend from your average miner, and stocks such as Telstra do it well, if not much else.
If you'd bought a Telstra share five years ago when it was trading about $4.85, the return - or yield - from the dividend would have been 5.8 per cent.
Add in the 30 per cent credit from franking and it was 8.3 per cent before tax (as well as after tax for super funds and many retirees).
Those dividends have totalled $1.54 in the five years since.
Compare that with BHP, a stock not noted for its attention to the cash needs of its shareholders. In early 2008 you could have bought a share for about $36 and the dividend yield would have been a paltry 2.2 per cent, plus franking.
But get this. Since then BHP has paid $547.24 in dividends.
Telstra was the better return - not that either did much to preserve your capital - but today the gap between their annual yields has shrunk from 3.6 per cent to 2.5 per cent and will contract more.
The next two Telstra dividends will each be 14¢ but BHP's will surely jump thanks to the drop in the dollar (it reports in US dollars), its asset sales, cost cutting, cancellation and postponement of projects and halving its spending on exploration.
Between the two of them, Rio and BHP will be digging up half the Pilbara, made possible from all that investment, and packing it off to China.
This unprecedented surge in iron-ore shipments will be the real mining boom for shareholders.
That's why fund managers are warming to the resources sector, especially the erstwhile capital-hungry blue-chip giants.
What they like is no exploration risk, no multibillion-dollar punts - well, for now - on projects that end up costing maybe twice what they were supposed to, less pressure on wage costs and the free kick of a weaker dollar.
All this as the potential competition is weakening. Lower commodity prices will close smaller, marginal mines, or at least prevent their commissioning.
The only threat to iron-ore prices, barring a meltdown in China, is Vale's Carajas project in Brazil, which will lift its production 35 per cent. But it won't be digging full time before 2018 and, hey, a lot can happen in the meantime.
Twitter @moneypotts
Big miners set to soar
Frequently Asked Questions about this Article…
The article notes Kevin Rudd’s claim that the mining boom is over as commodity prices wane and the mining investment boom is slowing. For the economy this drains tax revenues, but for investors the picture is more nuanced: while some mining share-price gains have faded, miners have left a legacy of growing dividends that can still benefit shareholders.
During the investment boom BHP rose about 50% and Rio Tinto about 154% from mid‑2008 to early 2011. Since then BHP has lost nearly all of those gains while Rio has kept roughly two‑thirds. The bigger investor takeaway has been an increase in dividends rather than sustained capital gains.
Yes — the article highlights dividends as the unexpected legacy of the mining boom. Big miners have been paying substantial dividends, and factors such as asset sales, cost cutting, reduced project spending and a weaker dollar mean dividends (for example BHP’s) are likely to rise.
Five years ago Telstra traded around $4.85 with a dividend yield of about 5.8%, and with 30% franking this equated to about an 8.3% pre‑tax return for some investors; Telstra paid about $1.54 in dividends over that five‑year span. BHP, by contrast, had a much lower yield in early 2008 (about 2.2%) but has since paid a large cumulative amount in dividends (the article cites $47.24). The gap between their annual yields has narrowed from 3.6% to 2.5% and is expected to contract further.
Fund managers like the large blue‑chip miners because there’s less exploration risk, fewer multibillion‑dollar project gambles for now, reduced pressure on wage costs and the tailwind of a weaker dollar. Plus lower commodity prices will shut marginal competitors, reducing competition for major producers.
Yes. The article explains that a weaker dollar helps miners that report in US dollars — it should lift reported earnings in Australian‑dollar terms. Combined with asset sales, cost cutting and scaled‑back capital spending, this should support higher dividends for companies like BHP.
The article points to an unprecedented surge in iron‑ore shipments — driven largely by Rio Tinto and BHP expanding production in the Pilbara and shipping to China — as the real mining boom for shareholders, rather than the previous investment boom.
Beyond a significant slowdown in China, the article identifies Vale’s Carajás project in Brazil as the main near‑term threat, which could lift Vale’s output by about 35% but won’t be fully online before 2018. Otherwise, lower commodity prices are likely to close smaller, marginal mines, which can support prices for major producers.
Call 1300 880 160
Start a chat
Schedule a call
