- Mining stocks become potential source for reliable dividends in an era of rising commodity prices and soaring inflation
- Years of underinvestment in extraction means that commodity prices are likely to stay higher for longer, benefiting mining companies which have shunned expensive mining projects and cut debt to focus on regular returns from operations
A long-ignored sector, mining stocks have seen a sharp change of fortune as yield-starved investors look for assets that can deliver strong income streams at a time of persistently high inflation.
Over the past week, two of the world’s biggest natural resource companies have blown past their record highs – BHP Group (-2.35%) and Anglo American (-0.56%), boosted by rising commodity prices and the prospect of big cash returns when reporting season starts in the coming week.
Other major mining companies, including Glencore (-0.78%), Rio Tinto (-1.28%) and Vale SA (-1.74%) are expected to declare strong dividends with the prospect of more to come, as demand outstrips supply.
Consumer price inflation in Europe and the U.S. have meant that the mining sector is one of the few that have been able to deliver yield to keep pace with rising prices.
Against a backdrop of higher inflation, one of the biggest challenges for investors has been to find real income opportunities, something which mining stocks are increasingly prized for.
Dividends from other sectors including banking, hospitality and travel and leisure have more or less dried up because of the pandemic, or reduced to cater for its effects, but the mining industry has filled that gap.
In the over a decade since the 2008 Financial Crisis, the mining industry has transformed dramatically under a new generation of leaders who have sought to slash debt, shunned expensive and splashy investments in massive projects and shifted to dividend policies linked to earnings.
Years of feast and famine have bred a far more conservative mining industry, which as recently as six years ago, found itself almost on its knees when a slowdown in demand from China, a reliable consumer of commodities, saw prices collapse and threatened to do the same to some of the mining sector’s biggest names as well.
But a new generation of management which has been more restrained in its extraction strategies could also mean huge upside in the years to come for investors.
Reluctance to pour cash into big new mines has left the pipeline of extraction projects particularly low, just as demand for metals key to the electrification of transport, especially nickel and copper, is primed to take off.
Higher demand at a time of underinvestment in extraction means that prices will almost inevitably rise, but the sector is also not without its risks.
Cash generation could be squeezed by higher oil and freight costs while workers are demanding higher salaries to work in the mines, eating into margins at a time when mining companies will need to double down on investments to reduce carbon impact from operations.
Nevertheless, if the investment thesis holds, holding on to mining stocks may make absolute sense against a backdrop of soaring consumer prices and insatiable demand for commodities.
