Higher iron ore prices tipped to swell dividends for investors
Australia's cashed up iron ore producers are tipped to share the revenue boost from a hefty iron ore price with their shareholders, rather than going on a mergers and acquisitions spending spree.
The global iron ore price, which now sits more than 35 per cent above some forecasts from just two months ago, at about US84, is tipped to swell the dividends paid to shareholders when they next distribute profits.
"I don't think they [the miners] should look at that cash flow as being a permanent fixture. The balance sheets are good, paying it out makes sense," said Mathew Hodge, senior resources analyst with Morningstar.
"Using special dividends rather than buybacks is probably the way to go too, given where the share prices are, the kind of multiples these things are on and given what's underpinning those earnings. There's definitely some temporary factors," he said.
The key industry benchmark price for iron ore has surged since January, in the aftermath of a horrific tailings dam failure in Brazil. The death toll from the incident at the Vale operation now sits at 201, with a further 107 still missing.
The incident has created uncertainty in the iron ore market and raised questions about Vale's production, with observers believing it could slash its annual iron ore production by tens of millions of tonnes.
Since the disaster, the stock prices of the three biggest Australian iron ore producers, Rio Tinto, BHP and Fortescue have surged, lifting their combined market capitalisation by a whopping $36.51 billion to $331.53 billion at the market close on Thursday.
The dividends to be paid by the three will be outlined in a few months' time, when the miners announce their results in August.
Mr Hodge said the bulked up iron ore price, which closed on Thursday at $US84.78 or about 11.5 per cent higher than the day before the Brazil dam collapsed, would have a "very meaningful" impact on the iron ore miners' profitability.
"It hasn't really done anything to the cost base. It's just a margin expansion, it's very meaningful relative to any fluctuation in volumes," he said.
Credit Suisse analysts, in notes to clients published on March 11 following the latest profit results, raised their target prices for Rio (from $79 to $84), BHP (from $34 to $36) and Fortescue (from $6 to $6.40).
"I would expect a pretty healthy August reporting season," said Sam Webb, resources analyst with Credit Suisse.
"It's going to be a pretty simple flow-through. They've got very clear dividend policies, all of them, and have all demonstrated a willingness to pay at least at the top end of those policies," he said.
Every $US10 increase in iron ore prices for Rio Tinto generated a further $US2 billion in "after tax, additional free cash flow," he said. "It's as simple as that."
I would expect a pretty healthy August reporting season.
Sam Webb, resources analyst with Credit Suisse
The ramifications for Australian households from high iron ore prices could spread well beyond the dividend payments. Iron ore prices are running well ahead of Treasury forecasts for 2018-19 of $US55 per tonne, likely adding billions of dollars in extra revenue to the federal government's coffers.
Economists say the extra revenue increases the chances of personal income tax cuts being announced by the Coalition,before the looming federal poll.