More shots to be fired as miners reward investors

Rio Tinto’s strong profit reported earlier today will please investors in one of state’s biggest employers, though the big miner’s fresh round of job shedding is a warning shot across the bows of the Western Australian economy, with more warning shots likely to be fired over the next 12 days.

A succession of corporate profit results from other big resources sector employers, including BHP Billiton, Fortescue Metals Group and Woodside Petroleum, is likely to paint a picture of tough trading at a time of low commodity prices, and more job cuts.

Rio Tinto’s 9 per cent profit fall of $US9.3 billion was in line with what the market expected after a tough year; but what was starkly apparent in the results is that employees have been relegated to playing second fiddle to investors, and most of those live overseas or in the eastern states.

While the profit slipped and total employment levels dropped, Rio Tinto showered its shareholders with a 12 per cent increase in dividends, boosting the annual payout from $US1.92 a share to $US2.15, and promised a share price boost by announcing a $US2 billion share buy-back program.

It can be argued that the owners of a business ought to have first bite at profits. After all, they are the people who provide the capital and take the risks in building the business, which then provides career opportunities for workers.

Unfortunately the pendulum of bias swings both ways, and while WA workers were enjoying an unequalled flow of high wages and special treatment during the boom years, it was the owners who felt short-changed, complaining loudly about low dividends and the poor performance on the stock market of the company they owned.

Today it’s a different story, with the pendulum swinging rapidly the other way, causing angst across WA; from the state government, which has taken a tax hit as workers struggle to find jobs, to contractors who have had the terms of their engagement abruptly altered, or have had their contract cancelled.

What the Rio Tinto result reveals is that the big fall in most commodity prices over the past few years is now being reflected in declining profits at precisely the same time investors are clamouring for higher dividends to offset the low rates of return they’re getting on savings.

Rio Tinto’s generous increase in dividend payments at a time of lower profits is a perfect example of the clash between shareholder and employee demands, with management in the middle trying to please both sides while also fending off unwanted merger overtures from arch-rival, Glencore.

Next cab off the local leaders profit-reporting rank is Fortescue Metals Group, which is scheduled to file its half-year report next Tuesday; most investment banks expect a reasonable result, with the steep fall in the iron ore price to be offset by heavy-duty cost cutting.

On an annual basis, which is the more meaningful way to measure performance, FMG is expected to suffer a whopping 80 per cent fall in net profit in the year to June 30, with analysts at UBS tipping a drop from $US2.73 billion to $US527 million.

FMG’s profit collapse should also lead to a 50 per cent cut in the annual dividend, from 20 cents to 10 cents a share.

Woodside Petroleum is scheduled to lodge its annual profit statement next Wednesday, and while it is expected to be strong because the oil-price collapse came late in the second half, the outlook is grim.

JP Morgan, for example, expects Woodside to report a net profit of $US2.48 billion, up 42 per cent on last year’s $US1.75 billion. But profit in the current (calendar) year is expected to fall to $US1.5 billion (and could drop much further if another investment bank, Goldman Sachs, is correct with its forecast of just $US366 million).

Employees and shareholders are expected to share the pain from forecasts of a sharply lower profit this (calendar) year, with Goldman Sachs tipping a total 2015 dividend of just US35.6 cents a share, down 85 per cent on the payout for 2014 earnings of a generous $US2.39 a share.

BHP Billiton will round out the reporting season for WA’s big resource companies with its half-year result due for release on February 24, complete with what analysts expect to be a 31 per cent profit decline, which will reflect lower iron ore, oil, coal and copper prices.

Over the full year to June 30, BHP Billiton’s profit is expected to fall by 55 per cent, from $US13.8 billion to $US6.3 billion.

Despite falling profits, BHP Billiton shareholders are likely to see a steady, albeit small increase in dividends, with payouts rising from $US1.16 a share in the 2013 year to $US1.21 last year and $US1.24 in the current financial year.

If those forecasts are correct, it seems that shareholders in BHP Billiton and Rio Tinto might be among the fortunate few to emerge from the commodity-price collapse with more cash in hand, courtesy of increased dividends which compensate for the paper loss on a lower share price.