Last year was dramatic for mining groups as they benefited from a post-pandemic recovery in demand which drove up the prices of commodities such as coal, iron ore, aluminum and copper . Profits soared as a result, and much of it went into shareholders’ pockets.

BHP Group Ltd., for example, generated operating cash flow of $27.2 billion and paid out record dividends of $15.2 billion in the fiscal year ended June 30, 2021. Likewise , its British-Australian peer Rio Tinto PLC reported operating cash flow of $25.3 billion for 2021 and an annual dividend of $16.8 billion.

However, investment is progressing more slowly.

According to FactSet data on the world’s big four diversified miners – Anglo American PLC, BHP, Rio Tinto and Glencore PLC – capital expenditure relative to cash generation has declined in recent years. The average capital expenditure to operating cash flow ratio for these four companies fell to 43% in 2017-21 from 78% in 2012-16, and analysts polled by FactSet expected it drops further in 2022-24 to reach 34%.

On the other hand, the dividend per share as a percentage of cash flow per share in the four companies is expected to increase to 44% in 2022-24, compared to 40% in the past five years, which was already up significantly from 22% in 2012-16.

Last month, Jefferies said in a report that capital spending in the mining sector remained at “recessionary lows” despite the significant rise in prices. The US bank said this was due to heightened geopolitical risk, recognition that growing supply kills prices and pressure from shareholders. to use cash for return of capital rather than growth.

“Mining supply will fall short of demand unless demand craters. Even as the industry ramps up investment in growth, the long lead time for capacity to come online will be an issue, and market deficits will likely persist for years,” Jefferies said.

Annual growth in mining investment could average up to 20% over the next five years, but even then it would still be too low to meet production needs, Jefferies warned.

But companies remain firm in their strategies. FTSE 100 mining and trading giant Glencore, for its part, does not plan to splurge. “We’re not bringing new tonnes into this market…unless the market really needs it,” Glencore CEO Gary Nagle told a Goldman Sachs analyst when asked if the company would further increase its investments.

“We don’t want the market to correct because of our tons,” he said.

Rio Tinto said it has raised its ambition to invest in growth capital to $3 billion a year from 2023, and plans to invest around $7.5 billion in decarbonization projects between 2022 and 2030. “Our goal is to invest consistently throughout the cycle. , balancing short-term returns for shareholders with reinvestment and reduced risk of future cash flows,” the miner told Dow Jones Newswires.

Anglo American bosses said they would be careful not to make non-organic investments. In a call with analysts in February, they raised concerns about the real outlook for demand for some of the metals linked to the energy transition, potential tax increases in countries like Chile and Peru and the current long lead times for new projects.

“We don’t need to go out and buy something that is high risk or high cost relative to where we think the value can be created. We have the ability to be cautious and take a bit of time,” chief executive Mark Cutifani said.

His BHP counterpart, Mike Henry, said his company’s medium to long-term outlook for demand and price had not changed and that capital discipline would continue, with shareholder returns trumping investments. “You have to believe it will…because you have a generation of executives in the industry that carries all the scar tissue from previous periods of indiscipline,” he said in February.

While positive in terms of short-term shareholder returns, the decision to limit capital spending could have a bigger impact on the rest of the world. Insufficient output growth can lead to higher commodity prices, which further increases inflation.

At the same time, the limited supply of metals such as copper, lithium or nickel could hamper decarbonization efforts, as these raw materials are used to build electric vehicles, wind and solar farms and power grids.

Veteran Wood Mackenzie analyst Julian Kettle warns that current mining investments are insufficient to secure the metals needed for the energy transition under the Paris agreement, as the deployment of capital is hampered by investor reluctance and the focus on maximizing dividends.

“Miners are still not generating growth to meet needs, and far from enough to ensure an accelerated transition,” Kettle said.

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