20/02/2014 - 12:15

Money moving from WA projects

20/02/2014 - 12:15


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Western Australia has reclaimed its position at centre stage in the money world, not because it is sucking in development capital but more so because it has become a global cash cow.

Money moving from WA projects
Fortescue Metals Group chairman Andrew Forrest has been a big beneficiary of the company's 10 cents per share half-year dividend.

Western Australia has reclaimed its position at centre stage in the money world, not because it is sucking in development capital but more so because it has become a global cash cow.

Investors in North America, Europe and in Australia’s eastern states are the big winners from what’s happening in WA today rather than people who live here – with one notable exception, Fortescue Metals Group boss Andrew Forrest.

Mr Forrest has trousered a handy $103 million in the form of a dividend cheque, thanks to the company he founded paying 10 cents a share from its record $US1.7 billion profit earned in the half-year to December 31.

Sharply increased dividends from other major local employers such as Rio Tinto, BHP Billiton, Woodside Petroleum and Wesfarmers highlight the transition of WA from its capital attraction and project development phase into its payout phase.

In simple terms, WA has flipped from ‘cash in’ to ‘cash out’.

This new phase of the resources boom is based on the cash-generating capacity of the capital invested in projects developed over the past decade.

In the case of FMG, the profits are flowing from its bold iron ore expansion, which less than two years ago came close to destroying the business during a downward slide in the iron ore price.

The company survived, obviously, and is now setting sail on its more mature phase of rewarding investors and bankers for their faith in the business. Investors get their dividends, and the banks get their loans repaid, with interest – in the latest half-year a whopping $US3.1 billion was returned to the banks.

Woodside is a similar story of capital coming in to develop WA oil and gas resources during the capital-in phase of the boom, with the company now in the cash out phase, showering its shareholders with a record half-year payment of $US1.03 a share (at a cost to Woodside of $US848 million).

The lion’s share of that Woodside payment will go to international investors such as the global oil giant Royal Dutch Shell, with its 23.1 per cent stake in the Perth-based company entitling it to $US196 million of the latest Woodside dividend.

The latest financial results of BHP Billiton and Rio Tinto tell a similar story of cash flow changing direction.

In business terms what’s happening is a healthy natural development, which will be setting up WA for the next burst of construction activity; because if there’s one thing that ensures investor interest in a region (or industry) it is the generation of dividends from committed capital.

How long the cash out phase will last is the unknown, because while locals might not like the reversion of WA to its long-term status as a profit and dividend generator, it will be popular with international investors.

It is even possible that, at some point in the current cycle of cash flows, the annual payment of dividends from work in WA will exceed the inward flow of capital for project development.

While the description of global cash cow might not sound attractive, it is an important marketing point for the future, particularly with WA facing increased competition for resource development capital from other parts of the world, such as Africa.

Fortunately, very few third-world countries recognise the importance of rewarding investors who have provided the capital to help develop their industries. They tend to see the cash flow as a one-way street, often erecting barriers to money leaving the country.

Australia, especially WA, has always had a different approach, recognising that unless the owners of capital get a fair return on their money they will not make future investments.

So, for now, it’s a case of enjoy WA’s newfound status as one of the best profit generating and dividend paying locations in the business world.

It might be annoying to see so much money flowing out, but if the dividend payments are maintained there is no doubt that the capital will flow back when it’s required.


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