Will the miners delay higher shareholder returns?

Recent weaknesses in key commodities could impact when miners return funds to shareholders.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors waiting for higher returns from mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) may be forced to wait a little while longer.

After years of below-par returns, shareholders have remained patient with the miners which promised that greater returns were on the way. BHP, for instance, has said that it will boost returns (likely in the form of a share buyback program) once its net debt level falls below US$25 billion. It was anticipated the miner could achieve this target as soon as August thanks to cost cutting initiatives and the sale of non-core assets. Rio Tinto could also undertake a buyback of shares or initiate a special once-off dividend, although that was not expected to happen as soon as BHP's.

As is the case with BHP however, the timing of the returns largely rests on each miners' ability to repay debts. BHP's debt is currently sitting at US$27 billion, while Rio Tinto's is around US$18 billion. Strong commodity prices leading into 2014 boosted confidence that these levels could be cut significantly sooner, rather than later, but the recent fall in the value of commodities has dampened that view.

Iron ore, for instance, is now sitting 22% below last year's averages after plunging more than 8% on Tuesday, while copper has also fallen 9%. Copper and iron ore are two of the cornerstones of BHP's "four pillar" business strategy which account for a large portion of the group's overall earnings. Meanwhile, iron ore accounts for more than 90% of Rio's earnings.

Although both companies have freed up cash from divesting non-core assets as well as from cutting costs and improving productivity considerably, they will both feel the effects of smashed commodity prices which will indeed impact how soon either can return funds to shareholders.

Foolish takeaway

Despite the bullish commentary surrounding the mining sector entering into 2014, it is still facing strong headwinds that are unlikely to subside any time soon.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »