- Global mining companies invested almost $1 trillion in major projects between 2008-2017.
- Despite strong industry conditions, almost one-third of that — $273 billion — was written off.
Global mining companies have had a good run since the start of this century. But research from Morgan Stanley shows big miners weren’t averse to shooting themselves in the foot while the money was flowing in.
In a research note on the global mining outlook, MS analysts said annual post-tax returns on capital for BHP and Rio averaged 14% from 2000-2017, up from 8% between 1981-1999.
Returns climbed above 18% in the period between 2004-2012, when Australian miners were digging as many resources out of the ground as they could, to supply the rampant demand from China’s booming economy.
"Unfortunately, a substantial portion of the associated cash flows was squandered," Morgan Stanley said.
The following chart, based on research from Price Waterhouse Coopers, tells the story:
It shows that in the period from 2008-2017, global mining companies invested around $939 billion in major projects.
Unfortunately, $273 billion was written off as impairments — equivalent to around 29% of the initial capital outlay.
As the chart shows, the extent of the writedowns was almost as high as the amount of dividends paid over the period.
Australia’s big miners played a role in that, with Rio booking huge losses on ill-fated aluminum and coal projects while BHP was forced into a multi-billion dollar write-down of its US shale oil assets.
Looking ahead, "the industry has made changes that suggest the capital destruction of the last 15 years should not repeat", Morgan Stanley said.
Dividend payout ratios are now typically held in a range between 40%-50%, with more cash returned to shareholders when profits rise which reduces the risk of overspending during buoyant market cycles.
In addition, companies now have more realistic growth assumptions, compared to the overly optimistic assessments in years past which were the catalyst for poor investment decisions.
And boards also have stricter remuneration policies, extending the timeline for share-based incentives and increasingly using return on capital as a core performance metric.
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