BHP, Rio, Glencore, Vale: Miners’ profit bonanza set to last into 2017

02 January 2017

Miners had been digging in one of the nation’s oldest collieries for almost a century until operations wound down a year ago, the victim of plunging global commodity prices.

Now its owner, Ivan Glasenberg’s Glencore Plc, is resuming output at the Queensland site, the latest sign of a profit bonanza bringing the world’s top metals and energy producers back from the brink.

Everything from coal to iron ore to zinc soared in 2016, rebounding from multiyear lows as output cuts and stronger demand trimmed surpluses. The rallies erased losses that sent the industry reeling from 2015.

The biggest companies — BHP Billiton, Rio Tinto, Vale and Glencore — may earn a combined $US26 billion ($36 billion) in the six months through December, a two-year high and 40 per cent more than during the June half, forecasts compiled by Bloomberg show.

And the windfall won’t end there. Analysts predict more income gains in 2017, which would bolster balance sheets and allow mining companies to pursue acquisitions, raise dividends and cut debt.

If construction remains strong in China, the top metals consumer, the pickup in demand may endure, according to Macquarie Group. Banks including Morgan Stanley have boosted their forecasts for metals prices and earnings by producers.

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“There’s an underlying demand that’s driving the pickup, and that’s probably sustainable,” said Edward Smith, Melbourne-based chief investment officer at LegalSuper, which manages $3 billion and holds BHP shares. “It is a recovery from those historic lows.”

What a difference a year makes. In January, commodity prices had hit the lowest in a quarter century, forcing companies to shut operations, sell assets and slash dividends to reduce debt as their shares tumbled.

Since then, markets have tightened and metals have been boosted by China’s credit-backed expansion of infrastructure spending. Prospects also improved with speculation that the election of Donald Trump as US president will revive growth in the world’s biggest economy.

‘Sweet spot’

The London Metal Exchange index of six industrial commodities, including copper and aluminum, is headed for its first annual advance in four years and the largest since 2010. According to the average of analyst forecasts compiled by Bloomberg, many prices will move higher next year. Goldman Sachs expects the gains to continue as global economic growth improves.

“We are in this sweet spot for free cash flow,” said Colin Hamilton, a London-based commodities analyst at Macquarie. He reckons the profit-fuelling conditions for the mining industry will persist into the first half. “Free cash flow will remain pretty strong, and they will be giving money back to shareholders.”

Earnings outlook

In February, “The Big Australian” BHP, the world’s biggest mining company, is set to report earnings before interest, taxes, depreciation and amortisation of $US8.5 billion for the December half, about 35 per cent more than the previous six months, according to the average of three analysts’ estimates compiled by Bloomberg.

Profit at Switzerland-based Glencore will advance about 24 per cent to $US4.9 billion, while Rio Tinto will report earnings up 20 per cent at $US6.4 billion, the forecasts show.

The gains will probably continue, according to the forecasters, which see the top four mining companies report another $US27 billion of combined earnings in the first six months of 2017.

Morgan Stanley says base metals are a better bet next year than coal or iron ore. The bank forecasts copper will rise to $US5346 a metric ton from $US4854 this year, and aluminium will advance to $US1786 a ton from $US1603. Zinc will reach $US2728 a ton next year from $US2085 in 2016, it said.

Citigroup says most raw materials will perform strongly next year. Goldman Sachs urged investors last month to bet on higher prices as global manufacturing picks up – the first time the bank has recommended an overweight position for commodities in more than four years.

Restarting work at Collinsville

Glencore, the world’s biggest coal exporter, said in October that it was hiring people for its Collinsville mine in Queensland’s Bowen Basin. The site, which began production in 1919, is preparing to restart early in the New Year, buoyed by rising demand from South-East Asia.

There’s no consensus on the duration of the rebound. Demand growth for commodities is likely to slow in 2017, while materials including copper, coal and iron ore are trading well above their marginal costs of production, according to Morningstar, which forecasts weaker iron-ore prices next year and in 2018.

While mines are generating more cash, “the question is looking further out,” according to Michelle Lopez, an investment manager at Aberdeen Asset Management, which globally manages $403 billion ($560 billion), including BHP and Rio shares. She questioned whether the price gains are sustainable given that China may reverse its policy on using less coal and because new iron-ore mines are expanding capacity.

But with more cash rolling in now, mergers and acquisitions have rebounded and dividends are back.

The number of mining deals in 2016 is the highest in six years. BHP and Rio altered policies to tie dividend payouts directly to profit, while Glencore and Rio de Janeiro-based Vale said they will resume payments that were halted amid the price collapse.

“The Chinese economy still has a long way to go before it’s built out,” said Nev Power, the chief executive officer at Fortescue Metals Group, the world’s fourth-biggest exporter of iron ore.

China will need more raw materials as it expands cities and transport networks to accommodate its growing population, he said. “We should expect to see that continue for perhaps a few decades to come.”

Source – Bloomberg