Evy Hambro, Blackrock’s chief investment officer for natural resources, says the mining industry can regain the trust of investors and achieve higher stock market ratings if it steps up cash returns.
Addressing the Mines and Money conference in London on Tuesday, Mr Hambro said the industry had a chance to boost shareholder returns before miners “eat their ore bodies” and need to invest again in new projects.
“I am not naive enough to think that capex is going to remain low forever, but I do think there is a window of opportunity over the next 12 to 24 months — I hope it’s at least 24 months — where we can get some big money coming back,” Mr Hambro told the conference.
Mr Hambro is one of the world’s most influential mining investors and his views are closely followed by the industry, which has a poor record of capital allocation. During the commodities boom of the 2000s, the mining industry squandered billions of dollars on ambitious projects and acquisitions to feed China’s seemingly insatiable appetite for raw materials.
As a result, most mining companies failed to generate positive returns despite record commodity prices, drawing the ire of institutional investors, many of whom are still wary of investing in the sector.
With balance sheets repaired and debts under control, Mr Hambro said big miners such as Anglo American, BHP Billiton, Glencore and Rio Tinto now had it in their powers to heal old wounds by making good on promises to return excess cash.
“It is within their decision-making processes to be able hand some of this money back and be sensible with regards to capital allocation. That’s what we are looking for at this stage in the cycle,” said Mr Hambro. “I think that will re-establish trust and bring people back into the sector, rotating from other areas.”
Aided by higher commodity prices, the FTSE All-Share mining index has risen 16 per cent this year, but the sector has become cheaper because share price gains have failed to keep up with earnings. Mr Hambro said there could be an “expansion” of price to earnings multiples next year but only if the sector lifted cash returns.
“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,” he said.
Looking further ahead, Mr Hambro said the industry needed to be more transparent about its investment decisions to avoid repeating the mistakes of the past.
“It is not good enough to say this meets our [return] hurdle. We need to have much greater clarity,” he said. “There’s no point having crazy commodity price forecasts to justify an investment.”
The price of industrial metals such as aluminium, copper and zinc and bulk commodities, including thermal coal and iron ore, have risen sharply this year, helped by strong global economic growth, which is running at its fastest pace since the financial crisis.
“The big surprise this year has been demand ” said George Cheveley of Investec Asset Management at the same conference. “Demand growth is much stronger than anyone predicted a year ago. Since the last week of June there has been incredible demand from consumers around the world.”
Source: FT.com
