There is a great scene at the end of the movie The Good, the Bad and the Ugly (one of the great movie titles too, btw) in which Clint Eastwood’s character says, while smoking a cheroot and waving his six-shooter around, “You see, in this world there's two kinds of people, my friend: Those with loaded guns and those who dig. You dig.”

Looking at the recent statistics on mining, share buybacks, dividends and global needs, I can’t help wondering whether we don’t need to unleash Clint on our mining execs. It's irritating to local populations, often exploitative and hazardous to employees, infuriating to environmental bodies, and great cause célèbre for rabble-rousing politicians. But the job of mining companies is to dig holes in the ground, preferably large ones.

We can bemoan the consequences of mining, try to minimise the risks and the damage to our environment. But the fact is that mining is crucial for everything. It just is. It has always been so, which is why we can see the remnants of mining in ancient Babylon.

The oldest-known mine on archaeological record is the Ngwenya Mine in Eswatini. At this site, Palaeolithic humans mined hematite 43,000 years ago to make red pigment, which was used for cave paintings. The ancient Atheneans grew rich on the silver mines of Lairion about 50 kilometres from the city in southern Attica. One assumes the slaves that toiled in the mines where members of the class of people without guns.

At the moment, slightly unbeknown to the residents of the world, miners have shown a keen desire to not dig any new holes. We can see this in the exploration budgets of the mining companies, who budgeted $11,2-billion for nonferrous exploration in 2021. That is slightly more than half of the budget in 2012 when spending peaked, according to S&P Global Commodity Insights.

It is higher than 2020, but it’s nowhere even close to the indexed metals price. The gap between averaged metals prices and exploration budgets has never been higher. In some cases, the gap between anticipated demand and anticipated production is getting positively scary. Copper prices are down recently because of a lock-down inspired slowdown in China, but they are still very high compared to the historical record. And looking forward, the demand-supply comparison, in a net zero scenario, starts to get seriously worrying by 2024. From then on, it just gets extreme with a 9% gap between demand and supply by 2030.

So what is happening here? Two things: The first is the great 2010 debacle. As commodity prices started rising sharply in the first decade of the 2000s, mining companies started spending more on exploration and new mines. Then, out of the blue, the 2008 financial crisis happened, and demand just fell off a cliff. There almost wasn’t a single major mining company that didn’t get seriously burnt in the process, and it was quite common to read about write-offs into the tens of billions. Shareholders don’t like that.

The second problem is dividends and buy-backs. This time around, mining companies have been jacking up their dividends and buy-backs, sometimes to the extent that is just ludicrous. Anglo’s dividend yield (dividends per share divided by the share price) is now sitting at 9%, which is quite a lot more than the very-best, special person, interest rate you can get at the bank. Rio’s is even higher at 12.3%, which just a little higher than BHP’s. Shareholders do like this — a lot.

Of course, dividend yields move about with fluctuations in the share price, but it's not as though mining companies have low share prices at the moment. Anglo’s share price is down over the past few months, but that only takes us back to where it was at the start of the year. Over a five-year period, Anglo’s share price is up 300%.

One of the problems is the structure of executive remuneration, which theoretically should be aligned with the share price so that the interests of managers and investors are synchronised. But with mining companies, in this situation, we have a weird anomaly. Left to their own devices, mining execs will continue jacking up the dividends, which will support the share price, which will boost their bonuses. But from society's point of view, actually we do want them to dig. Copper and zinc are both crucial ingredients in batteries, solar panels, and turbines.

Mining execs will argue, correctly as it happens, that they are under pressure from activist groups to moderate their expansion plans. There are also concerns about the state of the global economy, and there is inflation to worry about. The problem is that the actual process of energy transition does require quite a lot of new-age metals — something which environmental activists don’t appreciate sufficiently.

Clint, I think we need you. Bring your gun.

Markets took a breather today, exhaustion abounds.

Good investing, 

Tim

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