While it might be fashionable for CEOs to sprinkle cash in the hands of shareholders now, what about the future and the growth premium that shareholders expect from mining companies?
Two recent examples of mining company increasing their largesse to shareholders have been Whitehaven Coal and BHP Billiton.
Whitehaven Coal stopped paying dividends years ago after the price plunged through the floor and the company focused on ramping up its Maules Creek open cut mine and sorting out the bugs in the new longwall at its Narrabri underground mine in New South Wales.
However, Whitehaven CEO Paul Flynn was brimming with pride when he announced the company had achieved a net profit after tax of $405.4 million for FY2017. All key financial performance metrics had improved on the previous corresponding period including sales revenue up 52% to $1.7 billion and operating earnings before interest tax depreciation and amortisation before significant items up 219% to $714.2 million.
“This is a fitting result for a company celebrating its 10 year anniversary of listing on the ASX and reflects well on all of those people who have shared and participated in the journey,” Flynn said.
“It is also pleasing to demonstrate the confidence that the board has in the business by proposing a distribution to shareholders. The company has a strong balance sheet so shareholders can expect to receive more returns.”
However, what about the future of the operations and the growth needed to sustain the dividends if coal prices make another plunge?
All is not rosy at its Narrabri cash cow.
Run-of-mine coal production at Narrabri for the next year is forecast to be in the range of 8 million tonnes to 8.4Mt.
In FY2019 and FY2020 production will be lower as the displacement caused by a fault mined through in earlier longwall panels increases.
The decision has been made to plan to step the longwall around the fault rather than attempt to mine through the fault zone due to the risk of damage and delay.
Less tonnages equals less revenue and less cash for dividends.
Meanwhile BHP CEO Andrew Mackenzie might be a dour Scotsman but he gleefully announced he would be lifting the final dividend from 14c to 43c.
The company had a strong profit in FY2017 without doubt.
Its Queensland coal operations’ underlying earnings before interest tax depreciation and amortisation for FY2017 increased by US$3.1 billion to $3.8 billion and its revenues almost doubled in the year to $6.3 billion from $3.3 billion in FY2016.
But all is not well in the Bowen Basin coal fields.
In the 2018 financial year, unit costs are expected to be $59/t, which includes additional contractor stripping fleet costs given forecast higher strip ratios and planned debottlenecking activities.
BHP’s NSW Energy unit costs of $41/t were in line with the prior year as a reduction in labour costs and favourable inventory movements were offset by a stronger Australian dollar.
However, unit costs are expected to increase to approximately $46/t in the 2018 financial year as mining progresses through geological constraints [the monocline], strip ratios rise and pit design initiatives are implemented to reduce costs in future periods.
These initiatives are expected to mitigate the impacts of the monocline and reduce unit costs from the 2020 financial year onwards, according to the company.
Hogsback hopes there are enough coins left in the piggy banks of some of these mining companies when the time comes to pay for these higher production costs, not to mention more exploration and more investment in plant and infrastructure to keep the tonnes coming.
