Miner Quibbles

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Major Miners

The Mining sector contributed 37% to the total dividends paid by the UK equity market in the last quarter*. This was more than the next five largest sectors combined. The market’s top three dividend payers, ranked by absolute pound sterling amounts handed over, were the Major Miners: Rio Tinto, BHP Group and Anglo American.


Digging Deeper

This dominance of the podium spots by the Miners is a result of two things. Firstly, they are extraordinarily profitable, helped by high commodity prices and their own efficient operating models. Secondly, the large Miners are being very disciplined about capital allocation. Scarred and scared by previous cycles their expansion plans are relatively modest. Instead of reinvesting in fresh holes in the ground, the profits are coming back to shareholders.


Not an Unalloyed Positive

How the Mining sector interfaces with the rising sustainability agenda and increasing ESG concerns is a thorny topic. The inconvenient truth is that metals will be vital for the energy transition: wind turbines are made from steel (in turn consuming tonnes of iron and coal), electrification requires miles of copper wire and lithium ion does not grow on trees. Our point here though is that the average holder of a UK index fund, whilst carefully recycling their domestic waste and occasionally forgoing the Volvo and walking to Waitrose, might be alarmed to discover that for the 2021 full year the Mining sector will single-handedly be responsible for nearly £1 in every £4 of their dividend income*.


Non-progressive, no progress

The large Mining houses have very sensibly given up on the idea of progressive dividends. So, instead of paying a dividend that is always a little bit more than last year’s, they now tend to pay out a fixed proportion of their earnings (say 40%-60%), with special dividends on top if they are feeling especially flush.

This raises a difficulty for the income orientated investor, demonstrated in the following brief imagined dialogue.


Q: So then, Income Person (IP), tell me this: what does Rio Tinto yield next year?

IP: Well, that’ll be about 40-60% of its earnings.

Q: OK, so what are Rio Tinto’s earnings going to be?

IP: Err, well, 70% or so of earnings are from selling iron ore.

Q: OK, so what’s the iron ore price going to be?

IP: Pass.  

Q: Want to phone a friend?

IP: That won’t help.


This means that the character of the equity market’s overall income has become not only a lot more variable, but actually unknowable.

In the short term we can be less equivocal. The iron ore price was over $170/t at the turn of the year, was over $200/t for much of the summer and is now below $100/t. We can be confident that the Miners will not be in the position to spoil investors next year to anywhere near the same degree as their recent largesse.  And given their out-sized contribution to the market’s current income, this will be a major handbrake on the overall dividend growth of the market in 2022.


Our Ability is Your Stability

The Slater Income Fund aims to produce an attractive and increasing level of income. Care is taken to minimise reliance on any one sector. For the ten months to the end of October, less than 9% of the dividends collected by the Slater Income Fund have been from the Mining sector. The zig and zag of commodity prices will make a consistently growing income a speciality item.  


*= Source Link UK Dividend Monitor Issue 47 Q3 2021


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