The price of iron ore is currently around $US120 per tonne. This compares with the price of around $US40 per tonne in 2016, the most recent low point.
This significant recovery in the price of iron ore over the last few years (and particularly in 2019) reflects continued strength of Chinese demand and problems with tailing dams in Brazil causing Brazilian production of iron ore to fall significantly. The current iron ore price also reflects that the Australian producers are unable to increase supply in the short term without significant capital investment. Further, the timing of a recovery of Brazilian iron ore production remains highly uncertain. This suggests that the recent strength of the iron ore price could continue for some time.
In 2011, the price of iron ore peaked at around $US185 per tonne. This was at a time where the $US/$A exchange rate was around parity. Currently, the $US/$A exchange rate is 0.70. Consequently, in Australian dollar terms, the iron ore price is currently close to the peak in 2011.
In recent years, BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) have conducted capital management activities recently in light of the strong commodity prices, sale of under-performing assets and a preference to hand back surplus capital and franking credits to shareholders.
In December 2018, BHP undertook an off-market buy back of BHP shares ($US5.2 billion). This was followed by a special dividend to BHP shareholders in January 2019 ($US5.2 billion).
In February 2019, Rio Tinto commenced an on-market buy back of $US1.1 billion, to be completed no later than February 2020. Rio Tinto also conducted buy backs in 2018 and 2017. Further, Rio Tinto paid a special dividend of $US2.43 per share in April 2019.
In addition, Fortescue Metals (ASX: FMG) has paid two special dividend in FY19. The first was $A0.11 per share in April 2019 and second was A$0.60 per share in June 2019. This is the first time Fortescue Metals has undertaken capital management activities (other than buying back debt).
The question arises whether the continuing high iron ore price provides further capacity for BHP, Rio Tinto and Fortescue Metals to undertake additional capital management activities in the second half of 2019. This will be closely monitored when the FY19 financial results of these companies are released in August 2019.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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