Smoke, mirrors and reality among major diversified miners

In terms of real financial paybacks to investors, hype from the major diversified mining companies can cloud the reality.

JOHANNESBURG - 

There has been lots of moaning and babbling from about this time a year ago, when Anglo American announced that it would be suspending dividends, apparently for the first time since founding in 1917. There was more gibberish last week, when arthritic groans were heard muttering that Anglo American had indicated a reinstatement of dividends, possibly later this year, unlike Xstrata, which already reinstated after a 2009 suspension.

What a difference a day makes, even more so a year, and, most definitely a decade . . . or almost. Mining companies are disciplined into planning years, if not decades, ahead, but have no choice in capital markets but to deal with investors that, on average, prefer to obsess across far shorter timeframes, sometimes as little as a few hours.

This all raises questions about just how much investors can remember about serious financial paybacks, in the form of cash. This little forensic exercise can probably be kicked off conveniently enough in early 2002, when the so-called commodities supercycle was launched, or booted into orbit. Most of the peaks were seen around mid-2008; there were earlier ones in mid-2007, such as nickel and uranium, and late ones around mid-2009, such as for seaborne iron ore and coking coal, where annual contract prices prolonged higher prices.

Upon that tapestry, London's four big diversifieds did battle, led by BHP Billiton, the world's biggest diversified resources stock, Rio Tinto, a mining house with, likewise, some of the best Tier I assets in the world, and, of course, Anglo American, and the fresh, newly-listed upstart, Xstrata. Late in the cycle, BHP Billiton would bid for Rio Tinto and later back out; ditto Xstrata where Anglo American would have been the prey.

Now that numbers for 2009 are in (BHP Billiton has a 30 June fiscal year), the outcomes are starkly visible, and probably misaligned when stacked alongside popular perceptions. Over the 2002 to 2009 period, BHP Billiton returned a staggering USD 30bn in cash to shareholders, of which more than half was by way of dividends. The balance of USD 13.3bn was by way of stock buybacks, a notion that some investors have some trouble with.

Stock buybacks have two key outcomes, both conveniently expressed by divisors. If an investor starts on day one with, say, a million shares in a company, say, equal to 1% of outstanding shares, his or her stake in the company rises each time a company stock buyback goes through the market. All else being equal, the market value of the company stays the same, but the investor's share of the value increases. At the same time, stock buybacks increase the investor's percentage claim to cash dividends.

Anglo American is next up, with a total cash return to investors over the 2002 to 2009 period of USD 20bn, including USD 9.4bn in dividends paid. Anglo American's returns have been further enhanced by distributions it has made of companies that have been spun off, such as Mondi.

And then there is Rio Tinto, where things were going swimmingly, with a return of USD 15bn over the period that was . . . sadly, and fully, negated by a 2009 rights issue that raised USD 15bn. This followed the ill-fated 2007 acquisition for cash of USD 38bn of Alcan, a deal that in Rio Tinto created the most indebted mining company in the world. The 2009 rights issue was also significantly dilutive; Rio Tinto's issued shares had been 1.4bn in 2002, but ended 2009 at just short of 2bn.

The cake in this party goes to Xstrata, which over the 2002 to 2009 period raked in a net USD 12.5bn in cash from investors, more than half that returned to shareholders by Anglo American. The dilutive effects have been exponential: from 253m issued shares in 2002, Xstrata now has 2.9bn in issue. An investor holding, say, 10% of Xstrata in 2002 would today hold a stake of just 0.87% of the company, had all rights issues been passed over.

These parts of the business models at the two groups are diametrically opposed yet, today, Anglo American and Xstrata hold roughly the same market value, USD 49bn, each. There may be some lessons in there, starting with the way Xstrata again primed the market by reinstituting dividends, while Anglo American stoically stuck to principles in place since 1917.

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