Metals & Mining: Dividend resilience preserves value

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
29 April 2020, 2:20 PM
Sectors Covered:
Mining, Energy

  • We review the diversified miners against a difficult 2020 global economic backdrop. We compare our Australian diversified mining coverage (BHP, RIO, S32 and for comparative purposes FMG) to global miners Anglo American, Glencore and Vale.
  • Ultimately, we see the combination of resilient dividend and balance sheet profiles as trumping some optimism in earnings forecasts.
  • Consensus earnings estimates still imply a ‘V’ shaped recovery is the current market base case.
  • Factoring in commodity prices -20% below current spot, we estimate RIO/BHP would still have dividend yields of 3-4% based on their respective dividend policies.
  • Our top preferences amongst our coverage are Rio Tinto (Add rating) and BHP Group (Add rating), while Anglo American (Not rated) appears well positioned amongst the offshore miners.

Balance sheets in great shape this time around

The diversified miners have lower gearing levels now versus when they entered the last downcycle, with gearing levels in a healthy range of -1% to 18%. The exception is Glencore (gearing 47%), which has maintained high gearing.

We see low sector gearing levels as a primary defense supporting positive fundamentals for the group. Since the last downcycle (2011-15), this group of diversified miners has not allowed their balance sheets to be stretched in the pursuit of new growth despite earnings having materially improved.

In 2020 that conservative approach is paying off with limited dilution risk across the group.

Consensus optimism our main concern

Based on consensus EBITDA estimates for the diversified miners, EV/EBITDAs across the group are set to near/test historical lows, implying next year (post Covid-19) will be stronger than last year (pre Covid-19) in relative earnings power. This suggests either:

  1. Metals/commodities will bounce hard from the current global economic slowdown
  2. Share prices have been oversold
  3. Consensus has been slow to cut forward EPS estimates
  4. All of the above.

Consensus targets and earnings estimates for the Australian miners have held up, while consensus has delivered heavy cuts to estimates for offshore-listed Anglo, Glencore and Vale. While fundamentals are generally healthy across the group, we see the group as potentially sensitive to deteriorating market confidence.

Dividend offers key valuation support

This group of miners boasts significantly stronger dividend yield profiles versus other sectors. We attribute this to the health of their balance sheets (ex-Glencore), their earnings- linked dividend policies and a comparatively healthier floor for mining industry earnings versus other more significantly impacted sectors.

While commodity prices might be volatile, we see dividend resilience as a key source of valuation support for diversified miners.

Covid-19 having direct and indirect impact

Measuring the direct impact of Covid-19 restrictions on individual global mining operations, and indirect impact to demand for commodities, remains a work-in-progress, while the health of fundamentals for diversified miners remains encouraging.

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