When commodity prices were rising, companies, desperate to increase their production, poured money into huge, expensive projects with little thought on costs.
But with the price of commodities now falling, miners have realised that the growth-at-all-costs strategy no longer works. Instead, miners have begun to shift towards a more sustainable business model, shedding unprofitable mines, focusing on free cash flow and dividend yields.
The mining industry is changing and miners are now putting their shareholders first. So, here are three ways to play this trend.
The bigger the better
BHP Billiton (LSE: BLT) (NYSE: BHP.US) is the world’s largest miner by market capitalisation and I believe it deserves a place within any portfolio. Indeed, one of BHP’s most attractive qualities is the company’s diversification. In particular, BHP’s business is based around four key pillars: coal, copper, iron ore and most importantly oil.
BHP has recently changed its strategy, slowing plans for growth, ramping up output at existing mines and paying down debt. Actually, BHP has just revealed record production figures for the nine months to March, despite slashing capital spending by around 20% during 2013.
Further, there are rumors that BHP could spin off around $20bn worth of non-core, low margin assets, as part of the company’s plan to return to growth. A disposal of this kind would leave BHP debt free with plenty of cash to return to investors.
What’s more, BHP is targeting cost efficiencies of $5.5bn by the end of the 2014. Rising production and falling costs only mean one thing; rising profits.
It would seem that City analysts universally agree BHP’s plans to boost profits will ultimately result in multi-billion dollar shareholder returns.
Another great pick for any portfolio focused on the mining industry is BlackRock World Mining Trust (LSE: BRWM).
BlackRock World Mining Trust is a specialist investment trust that invests predominantly in the shares of mining and resources companies. The trust’s three largest holdings are, BHP, Rio Tinto and Glencore Xstrata, so investors can benefit from exposure to the mining industry’s three key players.
Management’s goal is shareholder returns, only investing in companies willing to return cash to shareholders in the form of dividends. The trust also invests in bonds and other securities such as, royalty payments, which give the trust rights to a share of future mine income in return for a loan.
At present the trust offers a gross yield of 4.6% and trades at a 4% discount to net asset value.
My last pick is Ferrexpo (LSE: FXPO). Now, at first glance Ferrexpo may look scary — the company’s operations are in Ukraine and Ferrexpo’s share price has not fared well following recent events within the country.
However, Ferrexpo’s headquarters are based in Switzerland and the majority of the company’s operations are West of Kiev, Ukraine’s capital, a region that has seen relatively little confrontation.
Ferrexpo is a low-cost iron ore miner that has been around since the 60s, and the company supplies around 30% of Europe’s iron ore. Costs are low, the company is mining ore for around $60 per tonne and recently begun international expansion plans by acquiring a 14.4% stake in Brazil’s Ferrous Resources.
Ferrexpo’s management loves dividends and the company has plenty of free cash flow. Since the beginning of 2013 management have declared both regular and special dividends totalling 13p per share, that’s a yield of around 9%.
And for value seekers, Ferrexpo currently trades at a historic P/E of 5.5.
The business of mining can make you rich but it can also make you poor. That's why the best investors build a portfolio with a combination of both risky mining companies and reliable dividend paying stocks, allowing you to sleep soundly at night.
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Rupert owns shares in Ferrexpo.