The Big Mining Problem: Where to Put All the Cash

It is the kind of problem most people, companies and governments would like to have.

The mining industry is beginning to run out of debt and this is proving to be a problem according to Andrew Keen, the head of metals & mining research at HSBC.

“We believe the cold reaction of the market to the buyback announcements of BHP and RIO during results season should signal to management that investors are asking for more in terms of capital return,” Keen said.

“At the same time, miners are very visibly profitable, a factor that will not go unnoticed to governments, unions and other stakeholders” he said.

Keen said he believes miners like Rio Tinto are now struggling to invest their huge cash pilesvia capital spending and should hand back cash to shareholders through higher dividends.

“We believe investors are interested in the potential yield in the sector but wary that high cash generation could also mean value destructive (mergers and acquisitions) or overinvestment, not returns to shareholders” Keen said.

“Higher dividend outflow is, in our view, the most politically sellable policy in a world of high inflation and would help avoid one of the key traps of buybacks for deeply cyclical stocks - issuing shares at the bottom of the cycle and buying them back at the top.”