Comment: Rich seam of mining share buybacks looms

BHP Billiton will focus on demerging businesses worth around $16bn. Picture: AFP
BHP Billiton will focus on demerging businesses worth around $16bn. Picture: AFP
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MAKING a profit out of mining has been money for old rope for much of the past decade, what with resilient commodity prices and the voracious demand from a surging Chinese economy, in particular.

Periodic macro-economic volatility and occasionally bitter emerging market labour relations aside, miners have generally been assured of pretty solid earnings against a benign sector backdrop.

That has especially been the case for big players with significant operations in Australia, a country which has been the quarry in China’s backyard to feed the Sino economic locomotive.

Taking in significant cash from asset sales, many major mining businesses are stuffed with cash that they are pondering what to do with. Share buybacks look a priority, but different companies seem to be working to different timescales.

Commodity trader and miner Glencore said yesterday it would launch a share buyback of up to $1 billion (£601 million) over the next six months, flush with the $6.5bn proceeds from flogging off its Las Bambas copper operation in Peru to a Chinese consortium.

Glencore, which also announced an 8 per cent rise in profits, is therefore first out of the traps among diversified miners in returning cash to investors.

By contrast, sector leviathan BHP Billiton, formed in 2001 from the merger of London-based Billiton with Australian’s BHP, has put a share buyback on the backburner to focus on demerging businesses worth an estimated $16bn.

BHP’s shareholders are understandably disappointed, but they should not be in the medium term. Simplifying the company around the four commodities of iron ore, copper, coal and petroleum – generating 96 per cent of group’s profit currently – makes not only strategic sense, but should drive cashflow and boost future returns.

As assets such as aluminium, manganese, nickel, silver and zinc are spun off by a more focused BHP, it looks like a case of investor largesse deferred, not buried.

And it is unlikely to be the last we see of special divis and buybacks in the rest of the heavyweight slice of the mining sector, either.

MPC split should not change rates picture

DESPITE the first split in years on the Bank of England monetary policy committee (MPC), I think the two members voting for an immediate rate hike are more outliers than indicators of a tipping point towards early monetary tightening.

Ian McCafferty and Martin Weale say there is a lag between the Bank rate going up and it being effective, so it should rise now to anticipate a similar lag in falling unemployment feeding through to growth in average wages. The latter is being used increasingly by the MPC as a criterion for judging when it should raise rates.

But my guess is that current benign inflation will trump the more nebulous lag times argument of the rate dissidents with the majority of MPC members until at least the New Year. There is still no compelling argument for the MPC to move on rates now.