Buybacks and Bumper Profits on the Cards as Mining Giants Report

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Buybacks and Bumper Profits on the Cards as Mining Giants Report
Credit: © Reuters.

(Bloomberg) -- A surge in iron ore prices is fueling hopes for bigger returns and a share-buyback spree as the world’s top miners prepare to report results.

BHP Group, Rio Tinto (LON: RIO ) Group, Glencore (LON: GLEN ) Plc and Anglo American (LON: AAL ) Plc are expected to announce bumper profits over the next two weeks. So far, the biggest producers have remained stubbornly focused on shareholder returns, rather than spending on the types of acquisitions and big-ticket projects that burned investors during the last commodity boom.

“This should be a stellar reporting season,” Jefferies LLC analysts said in an emailed note. “We expect very strong results, a continued emphasis on capital returns, some discussion of potential growth, and a wave of consensus earnings upgrades.”

Igniting Iron Ore

Iron ore prices surged about 20 percent this year after last month’s deadly dam breach at a Vale SA iron ore mine in Brazil sent the market into turmoil. BHP, which reports results on Tuesday, and Rio Tinto Group, publishing next week, “are clear beneficiaries,” according to Jefferies.

There’s likely to be a focus on the extent to which other producers can ramp up output to fill the gap left by Vale. Still, top producers are operating close to capacity, according to Macquarie Wealth Management.

Investors will also be looking for reassurances from miners regarding their safety controls in the wake of Vale’s disaster. Anglo American is likely to face questions regarding the operating license at its Minas Rio dam in Brazil and the risk to production if that approval is not received, according to Jefferies.

Bigger Buybacks

Analysts are expecting record earnings from Glencore, but the bigger question is what it plans to do with all the cash being churned out of its mining and trading businesses. The stock has been weighed down by a U.S. probe into the company’s activities in the Democratic Republic of Congo, Venezuela and Nigeria, as well as environmental concerns over its exposure to coal, Jefferies said.

To lure investors back, Glencore is expected to return billions of dollars in the form of dividends and share buybacks. Jefferies analysts estimate it could buy back at least $4 billion of shares this year -- equal to about 7 percent of its market capitalization.

Drill or Buy

The copper market got a jolt earlier this month when Robert Friedland, the founder of Ivanhoe Mines Ltd. and arguably the mining industry’s greatest showman, gave fresh details about the “mind-boggling” copper mine he’s building in Congo.

With financial support from Chinese backers Citic and Zijin Mining, Kamoa-Kakula will become the world’s second-largest source of copper within the next decade, Friedland said at the Mining Indaba conference in Cape Town.

The pronouncement should sharpen minds in the boardrooms of mining companies that have grown gun-shy on exploration and acquisitions since the downturn in the commodities supercycle. There’s near-unanimous agreement among executives that the copper market will move into a deep deficit in the next decade, and the question is when will miners commit capital to filling the gap.

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