Australia’s biggest mining companies have been forced to change their ways. Mine development costs in Australia have skyrocketed over the past 10 years as labour, regulatory and environmental expenditure grew much faster than earnings.
Developing new mines has simply become uneconomical for many companies as rising costs leads to lower return on capital and decreasing shareholder returns. As a result, our large mining companies Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), Woodside Petroleum Limited (ASX: WPL) and Fortescue Metals Group Limited (ASX: FMG) have shelved expansion plans in favour of returning more earnings to shareholders.
Woodside has staged possibly the most remarkable change in strategy, shelving a number of huge projects and boosting the dividend payout by over 100% from 125 cents per share in 2012 to 278 cents in 2013 (including a special dividend). Woodside’s dividend yield jumped from 3.7% to 7.5%!
It’s a similar but less spectacular story at BHP and Rio; dividend yields have risen from below 3% in 2012 to an expected 3.5% in 2014 as dividend growth has outpaced earnings growth.
The best mining yield in 2014
Quite clearly investors can see that the best yield on offer from the big miners is going to come from Woodside. Assuming no special dividends this year, the company is expected to yield around 6.3% in 2014, however some analysts are concerned that the company has ceased too many growth projects.
For the iron ore miners, Rio and BHP are forecast to yield around 3.4% and 3.7% in 2014. Additionally the companies are in the process of reducing gearing while investigating suitable overseas investments that meet return on capital and equity requirements.
Finally, one for the future is Fortescue metals. The company is rapidly paying down debt to its desired 40% gearing level and is forecast to yield over 6% this year. Once 40% is reached, the company plans to investigate further shareholder returns or could investigate increasing iron ore output if conditions are right.
Australia’s large mining companies are quickly becoming a viable option for investors searching for reliable yields. Woodside and Fortescue currently offer the best yields, but have the most uncertainty, while Rio and BHP have huge, long life mines producing at low-cost to deliver sustainable returns to shareholders.