Pile-of-cash dilemma for mining industry once crippled by slump

With metals from zinc to palladium trading at multi-year highs, four of the world’s top producers generated combined free cash flow last year of about $87m a day. Some of the unprecedented windfall is earmarked for dividends, which companies including BHP Billiton [JSE:BIL] and Glencore [JSE:GLN] cut or eliminated during the slump.

Where the rest of the money goes - into new mine projects, acquisitions or a bank account - remains one of the big unanswered questions for executives, investors and bankers attending Africa’s biggest mining conference which began in Cape Town on Monday.

Companies may be reluctant to spend too much, given the disastrous results of rapid expansions a few years ago.

“You can’t give it all back,” said Ben Davis, an analyst at Liberum Capital Markets in London.  “There will be some M&A towards the back end of the year. No one wants any new mines, but you have to use this money for something, and it’s not all going as dividends.”

BHP, Glencore, Rio Tinto and Anglo American [JSE:AGL] generated $31.9bn of free cash flow during their 2017 fiscal years, which exceeds their haul during the last commodity boom in 2011, according to analysts estimates compiled by Bloomberg. In 2018, the flow will be an estimated at $31.2bn, encouraging companies to give more back to shareholders.

Anglo is set to make its first annual dividend since 2015. Rio Tinto, which made a record $2.5bn interim payout last year and bought back more than $2bn of shares, is forecast to make its highest ever full-year dividend and buy back another $1.9bn of stock. Even Glencore, which usually favours deals over dividends, in December promised to double its payout this year.

Still, even after those distributions to shareholders, the industry will have $80bon in excess cash over the next three years, according to Macquarie. Companies are likely to use some money to pursue growth opportunities, but they don’t have a lot of options for new projects over the next year or so, Macquarie said.

During the last commodity boom, companies built too many mines, borrowed too much and made a lot of bad deals - all of which soured when prices went south. To stay afloat, producers sold assets and cut costs to become leaner, and now they’re reluctant to repeat their mistakes.

Just last month, Rio dropped out of the bidding for a stake in one of the world’s biggest lithium mines, which was valued at $5bn.

Such restraint has helped the bottom line as prices rebounded. Copper, nickel and iron ore are up more than 50% from market lows in early 2016, while precious metals have posted double-digit gains.

The Bloomberg World Mining Index, which tracks 117 company shares, has doubled since touching a 12-year low in January 2016. After reporting losses in 2015, the companies reported their highest combined profit last year since 2012.

“They are now a lot more disciplined in their investment plans,” said Alex Crooke, co-head of equities at London-based Janus Henderson, which oversees about $305bn. “They are being quite modest, and that makes me happy.”