BlackRock sees more room for miners to cut costs, hike payouts
* Miners could return more capital to shareholders
* Copper, iron ore producers tipped to make handsome returns
By Maytaal Angel and Clara Ferreira-Marques
LONDON, Oct 12 (Reuters) - Mining firms, already cutting back after years of rising costs, could do more to tighten their belts and should use the proceeds to increase payouts to yield-hungry investors, BlackRock, the world's largest fund manager said on Friday.
As demand weakens, BHP Billiton , Rio Tinto and others are reviewing tens of billions of dollars of new projects and cutting back staff, from office workers to mine engineers, particularly in high-cost regions like Australia.
Over years of cranking up production to catch high prices, many investors complained that the need to increase volumes had pushed companies into ever costlier projects, at the expense of returning cash to shareholders through dividends and buybacks.
"The trends we are seeing in the industry are ones where capital is being cut and costs are being cut, that's obviously going to free up cash flows," said fund manager Evy Hambro, BlackRock's investment chief for natural resources and one of the sector's best known names.
"It's a question of what the companies do with their cash flows. We're hoping that some of that cash flow comes back to investors in the form of higher payouts."
Hambro called for a better balance in capital allocation by miners, which are traditionally keen to put money into new projects and acquisitions, and only after that hand it back to investors.
A Deutsche Bank report last December considered the cumulative benefits since the start of the metal price boom in 2006, and found shareholder returns for a basket of the four major diversified miners were up 174 percent.
But that compared with a 447 percent increase in the amount paid to governments in taxes and royalties, and a 210 percent increase in average salaries paid to staff.
Hambro told Reuters that dividends and yields had risen considerably in the sector over the past few years.
"It's pleasing to see but I think there's more that can be done."
Hambro said he was overweight on copper miners, his only area of substantial exposure to base metals. He is also exposed to iron ore producers.
In both cases, the bet is not on the price of the metal, but on the companies' profitability, Hambro said.
"We think high copper prices above $3 a pound are going to be with us for some time to come, so copper producers are going to make very handsome returns on their assets," he said.
Copper production has failed to meet forecasts in recent years, with the metal mostly recording a supply-demand deficit as miners struggle with low grades, labour woes, political instability and operational troubles.
"We have very significant exposure to iron ore in the portfolio. That's again not a view that iron ore prices will go up, rather it's a view that the profitability of the mining companies that produce iron ore is likely to be sustained."
From mid-April to early September this year, iron ore prices
lost almost half of their value, falling from nearly $150 a tonne to just over $85 a tonne, on slowing demand from the oversupplied Chinese steel market.
Hambro, however, expects China's government to succeed in managing an economy whose growth is cooling to a slower pace.
Government efforts like stimulus measures announced earlier this year are widely expected to encourage demand.
Hambro said his fund was not exposed to aluminium, lead or zinc.
"The price of those commodities might go up but we don't expect to see significant profit margin expansion for producers exposed to those commodities."
In precious metals, Hambro likes the outlook for gold equities, but not platinum - his funds are exposed to just one producer of the white metal.
"We've been underweight South Africa for a long time. The recent issues, I think the wage settlements will come and the strikes will abate, but I don't see that changing our view."
South Africa produces about 80 percent of the world's platinum.
In August this year, a strike at platinum producer Lonmin
turned violent, leaving 44 dead and dozens injured in clashes between police and striking workers. The clashes have since sparked a wave of illegal stoppages, pushing the "platinum belt" death toll near 50.
(Editing by Helen Massy-Beresford)
Keywords: BLACKROCK MINERS