Prognoz fits this well
(Kitco News) - Many mining companies are reporting record earnings, enabling them to pursue capital expenditures or acquisitions of new properties that mean potential for further growth. Yet at the same time, they are facing rising output costs, with investors often also wanting dividends.
Those are some of the trends that appear to be shaping up in the mining arena at the moment, as outlined by David Haughton and Tony Robson, co-heads of mining research at BMO Capital Markets, following the 20th annual metals and mining conference hosted by the bank this week in Hollywood, Fla.
The event drew representatives of 254 companies and 429 institutional investors, with 1,453 attendees in all, Robson said.
“I think the size of this year’s conference shows that interest in the metals and mining sector has picked up quite a bit compared to two years ago,” Robson said. He pointed out that there were more general portfolio managers attending, as well as those who normally specialize in the mining sector.
Among large-cap, diversified base-metals companies, a reoccurring theme was strong balance sheets, including the likes of BHP Billiton, Rio Tinto, Freeport McMoRan Copper & Gold and others, Robson said. Companies were not necessarily debt-free, but have “very strong” cash flows, he said.
This appears to be helping generate interest for mergers and acquisitions, cash payouts for shareholders, and efforts to expand mining operations, he said.
Still, there are some challenges, including rising output costs, Robson said. BMO estimated production costs were increasing at an annual rate of around 15% during the second half of 2010, including the effect of currency movements. “That’s a real concern to the industry,” he said.
Haughton reiterated many of same points when discussing precious-metals companies.
“When it comes to producers…there are record levels of profits and record levels of cash flow,” he said. “There is a greater need for investment in the industry by these large companies. However, they are facing capital costs and timing pressures, together with operating-cost inflation.”
Increasingly, labor shortages are becoming an issue, Haughton said.
“The companies themselves have got sufficient cash flows to contemplate capital returns to shareholders,” he said. Nevertheless, companies are trying to find a balance between dividends and pursuing future development. One concern is if they start paying out too much to shareholders, there might be viewed as “capitulating” on future growth, he said.
He also cited potential for mergers and acquisitions.
“World-class ore bodies are rare,” Haughton said. “As a consequence, they are going to be very well bid for by the larger predators.”