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 cuttingback after years of rising costs, could do more to tighten theirbelts and should use the proceeds to increase payouts toyield-hungry investors, BlackRock, the world's largest fundmanager said on Friday.

As demand weakens, BHP Billiton , Rio Tintoand others are reviewing tens of billions of dollars of newprojects and cutting back staff, from office workers to mineengineers, 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 hadpushed companies into ever costlier projects, at the expense ofreturning cash to shareholders through dividends and buybacks.

"The trends we are seeing in the industry are ones wherecapital is being cut and costs are being cut, that's obviouslygoing to free up cash flows," said fund manager Evy Hambro,BlackRock's investment chief for natural resources and one ofthe sector's best known names.

"It's a question of what the companies do with their cashflows. We're hoping that some of that cash flow comes back toinvestors in the form of higher payouts."

Hambro called for a better balance in capital allocation byminers, which are traditionally keen to put money into newprojects and acquisitions, and only after that hand it back toinvestors.

A Deutsche Bank report last December considered thecumulative benefits since the start of the metal price boom in2006, and found shareholder returns for a basket of the fourmajor diversified miners were up 174 percent.

But that compared with a 447 percent increase in the amountpaid to governments in taxes and royalties, and a 210 percentincrease in average salaries paid to staff.

Hambro told Reuters that dividends and yields had risenconsiderably in the sector over the past few years.

"It's pleasing to see but I think there's more that can bedone."


Hambro said he was overweight on copper miners, his onlyarea of substantial exposure to base metals. He is also exposedto iron ore producers.

In both cases, the bet is not on the price of the metal, buton the companies' profitability, Hambro said.

"We think high copper prices above $3 a pound are going tobe with us for some time to come, so copper producers are goingto make very handsome returns on their assets," he said.

Copper production has failed to meet forecasts in recentyears, with the metal mostly recording a supply-demand deficitas miners struggle with low grades, labour woes, politicalinstability and operational troubles.

"We have very significant exposure to iron ore in theportfolio. That's again not a view that iron ore prices will goup, rather it's a view that the profitability of the miningcompanies 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 fromnearly $150 a tonne to just over $85 a tonne, on slowing demandfrom the oversupplied Chinese steel market.

Hambro, however, expects China's government to succeed inmanaging an economy whose growth is cooling to a slower pace.

Government efforts like stimulus measures announced earlierthis year are widely expected to encourage demand.

Hambro said his fund was not exposed to aluminium, lead orzinc.

"The price of those commodities might go up but we don'texpect to see significant profit margin expansion for producersexposed to those commodities."

In precious metals, Hambro likes the outlook for goldequities, but not platinum - his funds are exposed to just oneproducer of the white metal.

"We've been underweight South Africa for a long time. Therecent issues, I think the wage settlements will come and thestrikes will abate, but I don't see that changing our view."

South Africa produces about 80 percent of the world'splatinum.

In August this year, a strike at platinum producer Lonmin

turned violent, leaving 44 dead and dozens injured inclashes between police and striking workers. The clashes havesince sparked a wave of illegal stoppages, pushing the "platinumbelt" death toll near 50.

(Editing by Helen Massy-Beresford)