Iron ore drives Rio Tinto and BHP’s dividend bonanza

Iron ore giants BHP (BHP) and Rio Tinto (RIO) have hiked dividends to record levels and given investors reason to believe even greater payouts are on the way. Some analysts are also talking about a new supercycle, driven by the Covid-19 recovery and green spending. 

BHP chief executive Mike Henry made much of the company’s metals production that would be in high demand if the energy transition sped up in his half-year results presentation. “In a Paris-aligned, 1.5 degree scenario, we expect that investment in such things as copper-intensive solar generation, nickel-intensive batteries, and steel-intensive wind turbines will contribute to a more than doubling of the amount of primary copper and a quadrupling of the amount of primary nickel demand over the next 30 years, as was produced over the last 30,” he said. 

BHP will pay shareholders a record half-year dividend of 101ȼ (73p). This was more than a fifth ahead of consensus expectations. Henry said there was also scope for another dividend increase at the end of the financial year. “We are constructive in our outlook for commodities and the business is performing really, really well,” he said. Henry and new finance chief David Lamont did not rule out share buybacks on top of the higher dividend when speaking to analysts on results day. 

Rio Tinto, reporting its final results for 2020, will pay a final dividend of 309ȼ and a special payout of 93ȼ. The total payout of 557ȼ is well ahead of the consensus estimate of 480ȼ, and overtakes the divestment-driven total from 2018. 

New Rio chief executive Jakob Stausholm said it had been an “extraordinary year”, noting the company’s “successful response” to Covid-19, but also the controversial destruction of the Juukan Gorge sacred site.  He said on an analyst call he was working hard for Rio to “earn back our respect and credibility with stakeholders”.  

Glencore (GLEN) also brought back its dividend this week.

In its 2020 results announcement, Rio also joined BHP and Glencore in committing to tackle scope 3 emissions from their products. These emissions, largely from Chinese steelmakers in Rio and BHP’s cases, are far larger than their operational emissions. 

Rio said it would work with its customers to drop steelmaking carbon intensity by 30 per cent from 2030. BHP is aiming to do this by 2030. This month, Microsoft founder Bill Gates said decarbonisation efforts would be pointless if steel and cement manufacturers do not quickly find carbon neutral options. 

Both Anglo-Australian majors relied on iron ore to drive profits last year, despite the copper price surge. Rio said the higher iron ore price boosted underlying cash profits by $3.3bn last year, while the uplift in copper prices added $405m. These easily outweighed weaker aluminium prices. Rio’s overall underlying cash profit was $23.9bn, a 13 per cent increase on last year, and net debt tumbled from $3.7bn at the end of 2019 to $664m a year later. 

Conditions in the iron ore space aren’t perfect, despite the strong prices: Rio has upped its 2021 and 2022 capital spending forecasts by $500m a year because of the stronger Australian dollar, to $7.5bn. Its forecast of A77¢ (43p) adds at least $1.30 in cost to each tonne of iron ore produced.  

BHP’s underlying cash profit was $14.7bn, a fifth ahead of last year. The miner had already flagged a $1.6bn impairment relating to its NSW Energy Coal (NSWEC) business and stake in the Colombian coal operation Cerrejón. 

Copper is set to provide an even stronger uptick in earnings for this year. The red metal is trading at an eight-year high over $8,000 a tonne (t). The 80 per cent price rise since March is only matched by the increase in 2008/2009, during the China-driven mining boom. 

Future commodity? 

While talking up BHP’s commitment to “future-facing commodities”, its boss is also open to buying more oil and gas assets. Last year, BHP bought an extra 28 per cent stake in the Shenzi field in the Gulf of Mexico, for $505m, taking its holding to almost three-quarters. 

RBC analyst Tyler Broda said a large oil acquisition would be “very attractive” for BHP, but warned its window was closing for this given the recent improvement in prices. 

Henry said in an analyst call he would be exploring further “counter-cyclical acquisitions” although will be wary of a course of action that would likely “add challenges in the group’s ESG narrative”, according to Broda. 

BHP has bigger decisions to make on the project level, including how to get rid of its thermal coal assets and whether to build the Jansen potash mine in Canada. 

The company is around six months into a two-year process to sell off the coal mines, and has not committed to a demerger or sale yet. Jansen was a pet project of former boss Andrew Mackenzie, and Henry made clear he was not happy with the process up to now. 

“The fact that we’ve got $4.5bn sunk into Jansen, and the time it’s taken us to get here is something that [we’re] certainly not pleased with and we will build upon the learnings that we’ve taken away from that in how we think about further projects in future-facing commodities,” he said. 

Rio Tinto has its own development challenges. It is aiming to reach the ‘caving’ stage at the Oyu Tolgoi underground development this year, where work begins on the areas that will be mined. To get to this point, Rio still has to get support from the Mongolian government and minority shareholders in Turquoise Hill Resources (Can:TRQ), the Canadian company through which it holds its stake in the project. Also on Stausholm’s plate is the difficult Simandou iron ore project in Guinea, the Resolution Copper project in the US, and the Jadar lithium project in Serbia, for which a feasibility study is expected to be completed this year. 

This year, supercycle or not, is shaping up to be pivotal for both companies. We recommend buying BHP and holding Rio Tinto.

Last IC View: Hold, 5,572p, 29 Dec 2020

Last IC view: Buy, 1,811p, 18 Aug 2020