By Clara Ferreira-Marques
LONDON, May 9 (Reuters) - Mining companies, under pressure to rein in spending and sell non-core assets, could hand back more cash than expected to shareholders, even in the event of weaker commodity prices.
The mining sector has traditionally taken a conservative approach to payouts, as companies preferred to plough spare cash into mines and projects. Yet with investors calling for spending restraint and better returns, miners could surprise with share buybacks or special dividends, analysts said on Thursday.
Sector specialists at Nomura and Liberum pointed to potential increased returns from Rio Tinto, the world’s second-largest producer of iron ore, and from Glencore Xstrata , which said last week it would not leave cash burning a hole in its pocket.
“On our analysis, Rio Tinto has significant scope to re-gear over the next several years,” Nomura analysts said, referring to the company’s ability increase its gearing, potentially though not necessarily by taking on more debt.
“Assuming around 30 percent gearing by year-end 2015, we estimate Rio will have around $30 billion of balance sheet headroom, equating to nearly around 35 percent of its current market cap (stock market value).”
Even with conservative commodity price forecasts, Nomura estimates $20 billion of balance sheet headroom at Rio.
But the brokerage also concedes the company may wait to secure disposals before it ramps up payouts.
“Given the more conservative approach of Rio’s new management team, we believe the catalyst to seeing cash returns will likely be upon the achievement of some of its planned divestments,” Nomura said.
Rio is reviewing a number of non-core businesses for sale, in addition to assets publicly earmarked for divestment - its aluminium operations and its diamonds unit.
Nomura said copper producer Antofagasta and BHP Billiton, the world’s largest miner, also stood out with “significant balance sheet headroom”, though family-controlled Antofagasta remains among the sector’s most conservatively run companies.
Liberum analysts said prospects for capital investment levels to decline from 2014, after spending on projects and expansions in developments peaks, would add to pressure for mining company executives to “act as owners” - meaning they would take a more shareholder-friendly stance.
One caveat is that miners are more likely to look at one-off special dividends and share buybacks, rather than making big increases to their base or ongoing payouts, fearing market conditions could turn and force them into embarrassing future cuts to their payouts.
Yet Liberum noted the sector’s dividend yield - of around 3.4 percent for Rio, for example, according to Reuters data - undervalued its ability to deliver strong shareholder returns.
“Major mining companies can deliver a higher (dividend) growth rate than the 5 to 7 percent reflected in current dividend yield consensus,” Liberum said.