UBS said the August results marked the second consecutive reporting period where miners had focused on returns and “value over volume”.
“While we don’t believe this will continue forever, especially given the sector’s track record over many years, we do believe it is sustainable in the near-term,” it said.
UBS noted that out of the companies under its coverage, Rio Tinto, Fortescue Metals Group, Alumina, South32, Newcrest Mining, OZ Minerals and Evolution Mining all announced dividends above its expectations.
Whitehaven Coal and Iluka Resources resumed dividend payments, while Rio Tinto and South32 increased their share buy-back programs.
UBS said strong forecast margins and free cashflow supported a 20% increase in returns over the next 18 months, and over 40% at current spot prices.
Analysts looked at free cashflow estimates over the next 18 months as a percentage of market capitalisation and deducted the funds required to meet targeted balance sheet metrics to come up with possible future returns.
“Whitehaven, South32 and FMG have the greatest potential to lift shareholder returns over the next 18 months, with free cashflow generation of greater than 20% of their market cap by end 2018,” UBS said.
“At spot, South32 and Whitehaven see free cashflow generation at greater than 30%, given the positive coal price environment.”
OZ and Iluka were seen as being the least likely to increase returns, with the focus to be on OZ’s recently approved A$916 million Carrapateena project and Iluka spends around $300 million on the Cataby project and the reline of the synthetic rutile kiln.
RBC Capital Markets said earnings were okay, while increased dividends were the positive from reporting season.
RBC analysts predict there will be $20-24 billion of additional unallocated cashflow over the next two years in the Australian mining sector.
It gives miners three options – save the cash, return it to shareholders, or spend it.
Of the companies under its coverage, RBC believes BHP, Independence Group, Western Areas, Evolution and OceanaGold are most likely to save the excess cash for debt reduction, while Rio, FMG and Regis Resources are most likely to boost shareholder returns.
South32, OZ, Sandfire Resources, Newcrest, Northern Star Resources, Resolute Mining, Saracen Mineral Holdings, Silver Lake Resources and Gold Road Resources are more likely to spend the cash, whether it be via exploration, growth or M&A.
“While simplistically companies are remaining disciplined, we are already seeing signs that the fervour around saving is abating,” RBC said.
“We don’t believe there has been any frivolous spending yet, however we are seeing a general uptick in sustaining capital and exploration expenditure, which are typically the first things to be sacrificed when a downturn presents.
“Significantly higher exploration spend from companies like Saracen, Northern Star and Newcrest all represent a marked move in strategy, while incremental capex at most operations should yield incremental productivity benefits as plant and infrastructure is optimised to capture the latent capacity.”
