Share buybacks are in vogue on Wall Street.
The second-longest bull market in history is hitting on the heels of a corporate tax break and huge earnings reports.
Executives have to make a decision of what to do with all that cash. Some will do boring things like pay down debt or increase capital expenditures. Others will return it to shareholders as dividends or share buybacks.
Even though some politicians think that buybacks are bad, it is just another way of returning cash to shareholders.
When buying back shares, it reduces the volume of shares on the market. That means each existing share is now worth a bigger piece of the company.
Share buybacks have the added bonus of making the company, and the executive team, look great. The share price climbs, and the earnings per share (EPS) increases.
Many executives have bonuses linked in part to increasing EPS.
It’s easy to see why share buybacks are so popular right now. And for some industries, like tech, buybacks are a great choice for all that extra cash.
But this trend is catching on in a surprising sector: mining.
Miners Shy Away From New Projects
The bear market in metals crushed miners during 2014 and 2015. They wrote off billions in projects that they bought at the peak of the bull market.
It’s not surprising then that miners are trigger-shy about buying new projects. Instead, they are turning to buybacks to appease shareholders.
The trend seems to be working. Rio Tinto (NYSE: RIO) and Glencore (London: GLEN), among others, announced massive buyback programs this year. Both will grow buybacks by an additional $1 billion.
That means the pipeline of new projects is shrinking. Such is the case with copper.
Analysts from Wood Mackenzie expect supply to decrease over the next three years while demand picks up.
It takes several years to turn a deposit into a producing mine.
Shrinking mines and a dearth of investment into new projects means that the shortage of supply will drive prices up.
Miners with enough output left will get a huge tailwind from higher margins.
Maybe then they will decide that all that extra cash should go into the ground, instead of into share buybacks.
If you are considering investing in miners, the iShares MSCI Global Metals & Mining Producers ETF (PICK) holds a suite of top base metal miners.
Good investing,
Anthony Planas
Internal Analyst, Banyan Hill Publishing