| Mining companies spending on dividends could come at the expense of new reserves, such as those found in the deepening open pit operation pictured above. Source: shells1/E+ via Getty Images |
Mining companies have taken profits from sky-high metal prices and returned them to investors rather than plow more cash into exploration or mine development, eroding the industry's production pipeline even as global demand accelerates.
Metal producers have spent a half-decade converting profits into dividend payments and share buybacks in a bid to keep pace with competing investment products and help mitigate investors' concerns about capital expenditures. Prices for many commodities approached or exceeded all-time highs over the last 18 months as the world worked toward a transition to a zero-emission economy, while economies struggled to bounce back as the COVID-19 pandemic receded.
But shifting the money back to investors has left fewer resources for exploration and acquisitions. Exploration budgets have shrunk to about half of the prior peak recorded in 2012, the rate of discovery for copper and even gold has dwindled, and mining companies are avoiding major capex-intensive mine builds in favor of more modest spending.
"The pendulum has swung far too far to paying dividends. And that's wrought significant damage to reserves and production profiles," said David Garofalo, CEO, president and chairman of Gold Royalty Corp. Garofalo is also former president and CEO of Goldcorp, a major gold miner that Newmont Corp. acquired in a 2019 transaction worth about US$10 billion.
Returns over investment
Diversified miner Teck Resources Ltd. more than doubled its base annual dividend in April, to 50 Canadian cents from 20 Canadian cents. The company also announced a C$100 million share buyback in February, which it increased by US$500 million in April.
Meanwhile, gold giant Barrick Gold Corp. doubled its first-quarter dividend to 20 U.S. cents per share after launching a performance-based policy that pegs dividend payments to net cash levels.
The company also announced a US$1 billion share buyback program in February. And many larger miners paid significantly higher dividends in recent years. Rio Tinto Group, for example, more than doubled its total annual dividend payout to US$10.40 per share in 2021 from US$4.43 per share in 2019. Newmont had more than tripled its quarterly dividend to 55 U.S. cents per share as of early March 2021, increasing from 14 U.S. cents per share in early March 2020.
Mining management say they can have it all. Newmont noted in April that it had issued US$2.5 billion in dividends since the company outlined a gold-linked dividend policy 1.5 years earlier.
"Our capital allocation priorities remain unchanged with a clear strategy: to reinvest in our business through exploration and organic growth projects, to maintain financial strength and flexibility on our balance sheet and to continue to provide industry-leading returns to shareholders," Newmont CFO Nancy Buese said on an April 22 earnings call.
Likewise, Barrick President and CEO Mark Bristow, who could not be reached for comment, said on a Feb. 16 earnings call that mining companies should be able to invest in their future and still make returns to investors.
Less money for new projects
Miners have pulled back on both new investments and exploration budgets. The $11.2 billion budgeted by the industry for nonferrous exploration in 2021 is slightly more than half of the budget in 2012 when spending peaked, according to S&P Global Commodity Insights.
"With gold production plateauing in the near term and expected to decline over the next five to six years, the industry is not making enough new, high-quality discoveries to support the long-term pipeline," Commodity Insights analyst Kevin Murphy said in an April 25 report.
Looking forward, exploration budgets and the declining trend in discoveries are unlikely to make a major near-term course correction, Murphy said in an interview. Mining companies are wary of overspending after chasing growth through debt-fueled purchases in a pre-2012 mining boom.
"There's been a real shift in mentality in companies from that growth, to just being very conservative," Murphy said, adding that investors "punished" indebted companies during a 2012-2019 mining sector downturn.
What investors want
Having adopted a more conservative mindset on growth, mining companies started paying more dividends in recent years, in part to compete with the popularity of exchange-traded funds and other products that gave investors new ways to invest in the space, analysts say. These included funds linked to metal prices and mining indices. The former type has the attraction of giving exposure to a metal without an investor having to buy equities and take on risks associated with mining costs and production.
"When the ETFs showed up, you could get your liquidity and your leverage to the gold price without worrying about diversifying the risk of technical execution that any specific company would have," said Joe Mazumdar, a mining investor who heads up Exploration Insights and a geologist who previously worked for Newmont in corporate development.
Mazumdar expects that mining investors accustomed to dividends will balk at companies that now try to pursue big new mine builds.
"Definitely, from a retail investor perspective, they're like, 'I don't want that part of the curve. I don't want the development. I want production,'" Mazumdar said.
Investor reticence over major capex, or supporting mining companies with more leeway to pursue it, stems from mining market booms when some companies chased growth over profits, perhaps taking it too far, Mazumdar and other analysts said.
"This is a hangover from the last cycle," Mazumdar said.
Companies should lead
Facing pressure to increase dividends, miners should push back, David Harquail, chair of Franco-Nevada Corp., said in an email. Toronto-based Franco-Nevada is a top mining royalty and streaming company.
"Investors go hot and cold on needing short-term returns versus investing for the longer term. In my experience, it is best to be counter-cyclical to what investors think is best," Harquail said, adding it was management's job to "manage and educate" investors.
In a similar vein, Garofalo argued fears over capex have gone too far and would haunt miners after too little investment went into replacing and growing reserves.
"There's really no balance right now, as far as I'm concerned, and there hasn't been for probably half a decade or more," Garofalo said. "It's been all about shareholder returns. And look at what it's wrought in terms of share-price performance for the gold companies. Even though gold is near an all-time high, the multiples are severely depressed. And that's because the underlying value of the business is shrinking."
While mining company executives and shareholders may fear getting burned again following the last expansion cycle that ended around 2012, some are concerned that increasing spending on shareholder returns is setting the mining sector up for broader failure.
"There'll be an overcompensation and it'll further inflate input costs because everybody will be rushing out to explore and build like they did coming out of the credit crisis a dozen years ago," Garofalo said.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.