LONDON Commodities group Glencore (GLEN.L) became the first of the large miners to honor promises to return cash to shareholders, announcing a share buyback program of up to $1 billion as it reported forecast-beating first-half profit.
Diversified mining companies have vowed to control their spending and reward shareholders more after being criticized for years of squandering money on risky projects that resulted in multibillion-dollar writedowns as metals prices started to fall.
However, rival BHP Billiton (BHP.AX)(BLT.L) failed to deliver when it held fire on an expected buyback announcement on Tuesday, while Rio Tinto (RIO.L)(RIO.AX) signaled a share buyback could come when it reports full-year results in February.
Expectation of Glencore making good on its promise was heightened with this month's completion of the sale of Glencore's Peruvian copper project Las Bambas to a Chinese consortium for $6.5 billion after tax, either through a buyback or special dividend.
Glencore, which completed a record-breaking acquisition of rival Xstrata a little more than a year ago, is the world's largest producer of zinc, used to galvanize steel, and one of the top miners and traders of copper and nickel.
However, while it has noted cost overruns at its Koniambo project in New Caledonia, it was the balance-sheet improvement from the Las Bambas sale that allowed it to accelerate the return of capital to shareholders.
"We said that with the sale of Las Bambas we would return extra cash to shareholders," Chief Executive Ivan Glasenberg said. "Our focus is on expansion that can generate profit, on a tidy, neat balance sheet and any excess cash we will give back to shareholders."
Set against a market capitalization of almost $80 billion, a $1 billion buyout is about half the size of the reward expected by some analysts, though Investec's Marc Elliott praised the company for its prudence.
"It would have been brave to make a more material return to shareholders before the year-end and with uncertain market conditions," the analyst said.
"This is a very sensible way to do it. It spreads out return to shareholders over a prolonged period and it doesn't put a lot of strain on their balance sheet."
After posting an 8 percent rise in first-half core profit, Glencore said the buyback will be carried out by the end of next March and any shares purchased will be held as treasury shares. Chief Financial Officer Steven Kalmin said keeping shares as treasury rather than cancelling them was more efficient than issuing new shares for potential acquisitions or for employees compensation later on.
The London-listed company, which differentiates itself with a large trading division in addition to mining operations, posted earnings before interest, tax, depreciation and amortization of $6.5 billion, helped by a strong performance from the trading arm. That topped a company-supplied analysts' consensus of $6.3 billion. The company also declared an interim dividend of $0.06 per share, an 11 percent increase on its 2013 interim payout.
The results however, also detailed issues it faced with the Koniambo nickel project it inherited from Xstrata, which has been delayed due to structural problems and energy availability.
The miner said the project's cost had swollen to more than $7 billion from $6.5 billion and cut the output estimate for the second time in less than one year to 10,000 to 18,000 tonnes this year, compared with 49,000-tonne guidance from Xstrata.
"We are sorting out Koniambo, of course its not an easy asset. It definitely costs a lot more to build than Xstrata ever imagined and it's definitely more delayed that Xstrata ever believed ... but we feel confident that we will get Koniambo to work," Glasenberg said.
Glencore, which reiterated its dislike of "greenfield" projects, said its focus was on organic growth but would also consider acquisitions if opportunities arose.
Asked whether it might be interested in acquiring base metals assets that will form a new mining company that rival BHP is spinning off and listing, Glasenberg said that thought would only be "a long time away".
"It's all about value. That company will be spun off and if people believe it's undervalued it will be an acquisition target. If it's overvalued, it won't be," he said.
The Swiss-based company said it could also invest in iron ore in Guinea, home to the disputed iron deposit Simandou, but only if other companies took on the risk to build the huge rail line and port required to export the mineral.
On the divestment side, Glencore said it still intended to sell its stake in South African platinum producer Lonmin (LMI.L) when appropriate.
(This story corrects figure to $6.5 billion in paragraph 15)
(Editing by David Goodman and David Evans)