Thursday 11 February 2016

The new normal in mining industry; scrapping progressive dividends.

A continuation of a trend that had emerged late last year when mining giant Glencore responded in earnest to shareholders fallout with the company's stock price has fully embedded itself into the mining industry with the latest announcement out of Rio Tinto that it would be scrapping its progressive dividend policy.

This after fellow competitors Vale SA and Anglo American followed in the shadows of Glencore who had taken a hard wrap over the knuckles when it was suggested that the disturbing price decline of commodities within the sector was increasing the inability of the mining producer from servicing the debt holding it had taken onboard while planning an extensive expansion programs.

It would seem the spotlight is now squarely on BHP Billiton who has yet to make a decision over whether it will take the same action to well up cash reserves that are facing a constant bombardment from loss making production. The move by Rio Tinto all but confirms that Billiton will act decisively if it wishes to stay in good favour with its shareholders, a fate which was tested when it had its ratings downgraded by S&P.
Chronicling the demise of the mining industry spans back to moment when China began its economic descendent from lofty economic growth numbers that ably prevented the world from disintegration after the Financial Crisis took hold of a bleak outlook. As with all good things, they come to an end and so did the demand for basic materials needed to form the backbone of an economy.

However far from the realism that stood firmly in place, mining companies proceeded with their ambitious expansionary plans in various commodities that they believed would be supplied with good demand once production came to market which obviously wasn't the case as things have panned out. It's this belief that caused the start of many ill fated moments that's presented themselves over the past 5 years in the mining space.

First to take a cut was the planned projects in the pipelines that didn't have such tremendous impact of shareholder valuation besides for the fact that the talked up earnings potential once flaunted weren't expected to be made which did leave a bit of disappointment. Following on from that was the capital expenditure with some projects that had already been started halted in the process as companies were beginning to feel skittish about the outlook.

Fast forward to analyst's worrisome assessment of Glencore and the need to cut further cash leakages on the balance sheet and we had come full circle with the resultant outcome being an gluttonous commodities market unable to find sufficient demand to meet current production output. The fact that we have reached such extreme of the spectrum eludes to the most poignant argument against those in favour of capitalism; Greed.

When it becomes part and parcel of the thought process the boundaries for which negative extremities could potentially impact know no limits.

How far away are we from a bottom?

No one knows but the fact that investors have had to curtail the one income stream it had relied on to steady their hands from shipping out capital elsewhere does suggest that the industry could face a bleak future in years to come in trying to convince once again of the investment opportunity.  
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