Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

The past year has been a lean one for anybody hoping to earn an income from mining shares.

Dividend yields on the Bloomberg World Mining Index fell to 1.4 percent on Monday, the lowest level since 2011 and well below the 1.79 percent that five-year U.S. Treasuries are offering.

Things are looking up, however. Vale SA, the world's biggest iron ore miner, said it will resume dividends, just 10 months after management sought to suspend them. Glencore Plc may also restart payments after skipping two installments, according to Credit Suisse Group AG, UBS AG and Macquarie Group Ltd.

Analyst forecasts for dividend yields have been ticking up for four months. The last time they ran so far ahead of historical payouts was in late 2014, shortly before a runup in yields (largely as a result of slumping stock prices) through 2015.

Incoming
Dividend yields on the Bloomberg World Mining Index have slumped. Analysts expect a recovery
Source: Analyst estimates, Bloomberg

A return to payouts would prove to be a welcome shift in the capital cycle for mining investors.

Faced with a grim overhang of debt and vanishing earnings as the past decade's commodity boom gave way to bust last year, big mining companies raided their shareholders to buy their way out of trouble. Capital spending was reined in, but so were dividends. Investors who wanted to see their companies survive had to grit their teeth. Trailing 12-month aggregate payouts by members of the Bloomberg World Mining Index fell in the most recent quarter to the lowest level in years.

Getting Paid
Dividend payments by members of the Bloomberg World Mining Index have hit a five-year low
Source: Bloomberg
Note: Trailing 12-month payments. Includes some double-counting for dual-listed companies.

Belt-tightening is all very well, but it's starting to feel so 2015. The Bloomberg Industrial Metals Subindex of futures prices is up 27 percent so far this year. Iron ore and thermal coal, which make up a major slice of revenue for BHP Billiton Ltd. and Rio Tinto Group, have risen more than 80 percent. Glencore has benefited from the coal surge. And coking coal, of which BHP is the dominant producer, has jumped almost 300 percent.

There's good news and bad news there for mining investors. With the recovery in commodity prices, miners' share prices have rebounded too. Of the big four U.K.-traded miners and Vale, only Glencore and BHP are (narrowly) below the levels at which they entered 2015.

Back From the Dead
Mining companies' shares have recovered most of the ground they lost in 2015
Source: Bloomberg
Note: Rebased. Dec. 31, 2014 = 100.

The bad news for those seeking dividend income is almost the same. Shareholders have been handsomely rewarded by capital gains -- if you'd bought 1,000 pounds ($1,240) of Anglo American Plc stock on Jan. 20, you'd be sitting on 5,585 pounds now -- so they aren't in desperate need of relief from dividends.

The hangover from commodity crashes can be oddly long-lasting, too. Even earnings don't automatically benefit from rising prices. Glencore, for instance, forward-sold 15 million metric tons of coal in the first half of 2016, when prices were low, meaning it missed out on the subsequent spike. The company reported a $395 million mark-to-market charge in first-half earnings.

Chipping Away
Aggregate net debt in the top 20 mining companies by indebtedness hasn't fallen that much
Source: Bloomberg

Debt can be even more persistent. That mountain of borrowings built up during the boom is shrinking, but ever so slowly -- and until it gets significantly smaller, shareholders shouldn't expect the kind of payouts to which they were accustomed over the past decade.

A company's dividend policy is a sort of contract with the future. Managements' ability to hit their payout targets is a useful indicator of their credibility  -- but there are few mining executives who think the coming decade will see a commodity boom to match the last one.

Mining dividends will return, but not on the scale of the past. The future is simply too uncertain to bank on.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net