February 21, 2017 / 12:30 PM / 5 months ago

Mining giants require more financial medicine

3 Min Read

A miner holds a lump of iron ore at a mine located in the Pilbara region of Western Australia, December 2, 2013.David Gray/File photo - RTX2PF9Q

LONDON (Reuters Breakingviews) - Mining's traumatic downturn is still fresh in the memories of BHP Billiton and Anglo American, despite their improved performance in 2016. Rising commodities prices and aggressive cost-cutting helped both companies to boost earnings and cut debt. But another investment splurge or borrowing binge is unlikely. Financial prudence remains the priority.

Unexpectedly robust demand for metals and natural resources is the main factor that has boosted the two companies' bottom lines. BHP - the world's largest mining company - said on Tuesday that it made a net profit of $3.2 billion in the six months to the end of December, compared to a loss after write-offs in the same period of the previous year. The price of iron ore - which makes the largest contribution to the company's earnings - increased by 46 percent over the same period. London-listed peer Anglo American also reversed previous losses to report a $1.6 billion full-year net profit, while planning to restore its dividend and easing back on asset sales.

Both companies are once again generating healthy free cashflow. BHP's EBITDA as a proportion of revenue margins is back up at levels last seen in 2011, when few foresaw the dramatic downturn in China's demand for raw materials. Together, the two groups paid down $9.2 billion of net debt in the second half of 2016.

When prices are rising, it can be tempting to use spare cash - or take on debt - to invest in extra capacity. This can have catastrophic consequences if demand falls suddenly, as it did in 2015. The good news for investors is that neither BHP nor Anglo is depending on the current strong market conditions to persist.

Anglo, which has raised $1.8 billion in asset sales in the last year and scaled back its business significantly, has the highest total shareholder return over the past 12 months among the four largest London-listed mining companies. Restraint remains the industry's best cure.

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