t the beginning of February, Rio Tinto, the world’s second largest diversified mining company announced its year-end results. Underlying earnings were up 69% but most interesting, net debt had fallen by$9.6bn to $3.8bn while free cash surged 60% to $9.5bn. And all of that good news was washed down with an increase in dividends to $2.90 per share, surpassing the previous record.
Shareholders were understandably pleased with this outcome. It’s interesting to compare the fortunes of a diversified miner like Rio Tinto with our ‘Gold Peer Group’, which represents the biggest and best global gold mining companies. (The Peer Group Service looks at a comprehensive set of metrics across the 12 largest gold mining producers; see below for further information.) Pre-2008, Rio Tinto typified a blue-chip company, typically rewarding its long serving stewards with knighthoods. Well before this, the company could boast that its dividend growth had exceeded the FTSE 100 for decades, an impressive record. However, like many of its peers at that time, it got a little carried away with its own hubris and used much of the cash on its balance sheet to make several questionable purchases. This included acquiring Alcan for $38bn, which introduced heavy financial gearing just before commodity prices collapsed after the financial crisis in 2008. A rights issue ensued, and overnight, Rio Tinto became a very ordinary company.
As a result, and in keeping with most in our The Gold Peer Group, Rio Tinto has spent most of the last decade rebuilding its balance sheet. Net debt has now been reduced sharply, by about fourfifths, dividends have recovered, and the share price has performed well, more than doubling over the last two years alone, although it remains below its 2008 peak. For The Gold Peer Group, the gold price peaked at nearly $1,900 at the end of 2011 before starting its fall to just over $1,000 by the end of 2015, and since rising to its current level of around $1,200. During this time of price recovery, net debt has fallen by 50% from its peak in Q2.13 but, disappointingly, dividends have not yet recovered in absolute terms. Dividends peaked for the peer group in Q2.12 and are now 62% below that level. Perhaps unsurprisingly, the weighted average share price for the peer group is only 39% above the bottom reached in Q3.15. To conclude, diversified mining companies have seen a significant recovery in cash generation and share price performance from their low point, in contrast to many gold mining companies. Improved cash generation from a rising gold price has nearly all been channelled into reducing net debt, rather than to shareholders. From our analysis of The Gold Peer Group, a much higher gold price is required before dividends can recover, not least because our analysis suggests that compaies have cut back on exploration and capital spend required to maintain longer term production. Dividends will be required before the share prices of The Gold Peer Group can realise a meaningful and sustained recovery, not unlike companies such as Rio Tinto who have enjoyed for the past two years or so.
The Gold Mining Peer Group Analysis is a quarterly service that looks at the top 12 gold producers as a peer group, and analyses their performance using a wide range of metrics, including: Production & Cost Statistics, Producers Margins, Capital Expenditure, Cash Flow Analysis, Balance Sheet Analysis, Investor Returns and Market Ratios.