Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
US coal companies have been paying outsized returns to investors for the past two years, offering near-term compensation even as share values sank. That won’t last.
Peabody Energy Corp. and Warrior Met Coal Inc. are among the miners that have paid out more than $1.25 billion to shareholders in dividends and share buybacks through the first three quarters of this year. That’s down from more than $1.5 billion for the same period last year. And as cash flow dries up, 2020 may be worse.
Prices for the coal used to make steel are down about 30% since May, hurt by a slowing global economy. There’s been a similar decline in the thermal variety, used by utilities to generate power: prices for Central Appalachian fuel have slumped 24% this year and are down 1.7% for Powder River Basin supply. That’s shrinking the pool of money that miners can give back to shareholders who have seen the value of the stocks plunge.
“They’re going to cut back on shareholder returns in 2020,” Vania Dimova, an associate director with S&P Global Ratings, said by phone. “All of them.”
Peabody, the biggest U.S. coal producer, has seen its share price drop 68% this year, setting up its second consecutive annual decline after emerging from bankruptcy. Still, the company paid out its largest-ever dividend in March, saying it planned to return to shareholders all of its free cash flow this year. The payout sent its 12-month dividend yield to 25%.
Warrior is down about 12% in 2019, poised for a second annual decline. In May, the company delivered a $4.42-a-share dividend, pushing its 12-month yield to 22%. The average dividend yield for the S&P 500 Index is about 2%.
Peabody, the biggest US coal producer, has seen its share price drop 68% this year
The company is “not going to turn off the capital returns,” Chief Financial Officer Dale Boyles said during an October conference call.
Peabody has seen its cash flow tumble to $92 million in the third quarter from $298 million a year earlier.
Chief Executive Officer Glenn Kellow said in October that the company remains “committed to shareholder returns.” He says the company has a four-step financial approach that starts with generating cash, bolstering the balance sheet and investing, with returning cash to shareholders coming last on the list.
“Our capacity to return cash to shareholders is dependent on our ability to generate cash,” said Vic Svec, a Peabody spokesman.
Many coal investors look at the shares as a source of short-term gains rather than something to buy and hold for the long term, said Andrew Cosgrove, a mining analyst for Bloomberg Intelligence. Cutting back on shareholder returns will make them less appealing. “It’s hard to think people will be buying into coal stocks,” he said in an interview.
And those who do may not get the same returns that investors have enjoyed this year. “I don’t anticipate any big special dividends,” Dimova said.
Many coal investors look at the shares as a source of short-term gains rather than something to buy and hold for the long term
Other companies have been more open about changing their plans. Arch Coal Inc., the second-biggest U.S. producer, returned more than $250 million to shareholders in the first three quarters of 2019, mostly through share buybacks. In October, the company said it expected to exercise “moderation” in repurchasing shares over the next few quarters, largely due to the slump in metallurgical coal.
In May, Contura Energy Inc. announced it planned to return as much as $250 million to shareholders in dividends and buybacks. It has yet to pay a dividend, and in November said it was suspending buybacks.
Arch and Contura didn’t respond to requests for comment.
If prices don’t increase significantly, the trend is unlikely to change next year, said Daniel Scott, an analyst with Clarksons Platou Securities. “The reality is, met coal down 30% this year has hamstrung all companies’ ability to return cash to shareholders,” he said.
(By Will Wade)
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