At the beginning of this year, as the price of iron ore soared, the future looked bright for Rio Tinto(LSE: RIO) (NYSE: RIO.US) andBHP Billiton(LSE: BLT) (NYSE: BHP.US). The two companies were ramping up production, paying down debt and hinting at the possibility of hefty cash returns for investors.
Peer Glencore(LSE: GLEN) was also tempting investors with the prospect of cash payouts.
Unfortunately, investors have now lost patience with these miners as promised cash returns have not materialised and the future is now looking bleak.
Miners optimism has once again been kept in check by concerns over the state of Chinas economy. These concerns relate to the state of the countrys property market, where reports suggest that developers are struggling to sell many home they have already built. Many homes are now sitting empty.
Whats more, Chinese steel mills have curbed their demand for iron ore, which has put pressure on the price of the commodity. The price of iron ore has slumped to a two year low as demand falls. However, BHP and Rio are still increasing their output of the key steel making ingredient, pushing the market into a state of oversupply.
Luckily, as BHP and Rio have some of the lowest iron ore production costs in the world, their operations will continue to remain profitable. Still, many other miners will feel the pain and Rios management expects that 125m tonnes of iron ore supply will be cut off this year.
Glencore is unaffected by this as the company has almost no exposure to the iron ore market.
Even though Rio and BHP have low production costs, a low iron ore price has prevented the two companies from achieving a high level of profitability. This has put pay to any plans which would have seen excess capital returned to investors.
Indeed, earlier this year both BHP and Rio had hinted that they were planning to return billions to investors through share buybacks. However, due to weaker commodity prices,cash return plans have been shelved. BHP expects the price of iron ore to remain low for some time.
With almost no exposure to the iron ore market, Glencore has more flexibility and isreturning $1bn to investorsvia a share buyback.The buyback follows the sale of the companys unfinished copper mine in Peru for $6.5bn, the sale of which was demanded by the Chinese authorities following Glencores merger with Xstrata.
Unlike BHP and Rio, Glencores management expects the company to be flush with cash over the next few years. The companyis cutting capital spendingfrom an expected $8.7bn this year, to $3.5bn by 2016, giving the company plenty of additional capital.
That said, in the grand scheme of things Glencores $1bn share buyback is tiny compared to the companys near $80bn market capitalization. Nevertheless, City analysts have commended the buyback, calling it a powerful signal of intent from management.
Still, at current levels BHP and Rio support attractive dividend yields and actually look attractive as income investments. For example, Rio currently supports a yield of 3.6%, while BHP offers a yield of 3.9%. Both these payouts are covered twice by earnings per share.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.