Teck Resources Ltd. (TCK/B) and Goldcorp Inc. (G) yesterday joined a list of Canadian resource companies cutting spending plans as firms appease investors who question the logic of large investments when commodity prices are weak.
Vancouver-based Teck, the country’s second-largest mining company, reduced its 2013 capital expenditures guidance by 7.5 percent to C$1.85 billion ($1.80 billion), while Goldcorp said spending will be about $200 million less this year than earlier planned. Other firms scrapping projects, cutting spending or deferring plans include Barrick Gold Corp. (ABX), Encana Corp., Eldorado Gold Corp. and Suncor Energy Inc.
“In the last couple of months it’s definitely been more of a focus for investors to concentrate on where the money is being spent,” said Steve Vannatta, who helps manage about C$6.7 billion in assets at Aston Hill Financial Inc. in Toronto. “Growth for the sake of growth, people aren’t rewarding guys for that anymore.”
Canadian companies are slowing investment just as policy makers are increasingly relying on business spending to drive growth in the world’s 11th largest economy. The International Monetary Fund projects Canada will be among the worst performing economies outside Europe in the Group of 20 in 2013.
The Bank of Canada’s commodity price index, while higher than the beginning of the year, has fallen 10.9 percent since reaching a post-recession high in May 2011. The central bank expects that an acceleration in business investment will help drive faster growth in 2014 once companies begin to see strong evidence of pick up in foreign demand.
Bank of Canada Governor Stephen Poloz says business executives are saying they’re still uncertain about foreign demand. CEOs are telling him “exports are growing but it’s not gangbusters yet and I’m not sure it’s going to last,” Poloz told reporters on July 20.
Data suggest the country’s largest companies are turning their focus to sustaining dividends and moving away from investment. Average capital expenditures among Canadian-listed companies valued at more than C$1 billion is expected to drop 15 percent to C$828 million in 2015 from C$974 million this year, according to Bloomberg estimates.
The average dividend yield, which measures disbursements to investors relative to a company’s share price, is seen rising to 4.17 percent by 2015 from 3.8 percent this year, according to data compiled by Bloomberg.
“We are prudently deferring projects and capital expenditures but we continue to pay a strong dividend and continue to buy back shares,” Teck Chief Executive Officer Don Lindsay said yesterday. He spoke on a conference call after the company reported that second-quarter net income declined to C$143 million, or 25 cents a share, from C$354 million, or 60 cents, a year earlier. Excluding one-time items, profit was 34 cents a share, topping the 32-cent average of 25 estimates compiled by Bloomberg.
Teck shares gained 72 cents, or 3 percent, to C$24.41 in Toronto yesterday, while Goldcorp lost 36 cents, or 1.2 percent, to C$28.88.
Over the past year, some energy companies including Whitecap Resources Inc., Torc Oil and Gas Ltd., and Surge Energy Inc. have said they’re changing their strategies to focus on yielding dividends.
Whitecap’s 28.9 percent gain this year is the second-best among oil and gas producers in Canada, after it announced in November it would focus on paying a sustainable dividend.
Vannatta said he recently bought shares in Calgary-based Black Diamond Group Ltd., which rents temporary structures for the oil industry, and Computer Modelling Group Ltd., a software company that specializes in energy, because of their “solid” dividend yield.
Gold producers have been among the most aggressive in cutting spending plans in recent weeks, after prices for the precious metal plunged 23 percent in the second quarter in New York. Eldorado, a Canadian producer of the metal with mines in China, Europe and Brazil, said July 16 it will defer expansion and slow development of projects, the same day Toronto-based producer QMX Gold Corp. said it is curtailing operations at the Lac Herbin mine in Quebec.
In an earnings report yesterday that revealed a $1.93 billion second-quarter loss, Goldcorp said it is reviewing operating plans and will defer some spending this year and next at mines it’s building in Argentina and Canada.
“The gold sector in general has been punished because they were growing for the sake of growth and they weren’t actually generating any returns,” Vannatta said. “You’ve definitely seen that space be more focused on capital efficiency.”
A focus on dividends can force companies to take on too much debt. Renegade Petroleum Ltd. (RPL), which has lost 52 percent this year, cut its dividend by 56 percent this month to ease worries about its debt levels. Penn West Petroleum Ltd. fueled gains after announcing dividend and staff cuts to repair balance sheets.
The impact of dividends on balance sheets isn’t the only concern. Falling investment means companies will have less capacity to grow sales and profits in the future, according to John O’Connell of Davis Rea Ltd. The trend could propel some companies into a “death spiral” of slow growth and debt, he said.
“Companies have given more thought to raising stock prices than their underlying businesses,” O’Connell, chief executive officer of Davis Rea in Toronto, which manages about C$600 million, said in a telephone interview. They “are very nervous about reducing their dividends even if it’s not sustainable.”
It’s more than just resource companies feeling pressure from shareholders. Tim Hortons Inc., Canada’s largest fast-food chain, recently faced criticism of its U.S. strategy from activist investors Highfields Capital Management LP of Boston and New York-based Scout Capital Management LLC, which hold 4 percent and 5 percent of the company’s shares. Both investment firms pressured the company to scale back U.S. expansion, and instead direct capital to share buybacks.
“Investors have forgotten dividends aren’t entitlements,” O’Connell said.
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