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What Should Base Metal Companies Focus On?

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VAN ECK: These are basically base metals, right?

REYNOLDS: … [b]ase metals, but, like the Glencores and the Rios and the BHPs of the world, that look at lots of different metals. Certainly, Glencore was the one that laid the blueprint out there for everybody: How we approach this. We’re going to be very, very focused on only producing profitable ounces and tons. We’re going to focus on returns, focus on cost, and eventually get towards paying a dividend. Maybe paying a special dividend, buying back shares. Now that sector is just starting to inflect to where gold is. They need to start thinking about growth.

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Market Realist

How is the base metal industry doing?

The presidential election proved beneficial to the commodities market—especially the base metal asset class. Base metals like aluminum, lead, copper, nickel, tin, and zinc are widely used for commercial and industrial purposes. Base metals are often considered as the building blocks of infrastructure. So, after President Trump promised to revive America’s infrastructure and manufacturing industry, base metals started gaining.

2017 was very positive for base metals. They were the top-performing assets in the commodities space, as we saw in the chart in Part 1 of this series. Global economic growth also contributed to the performance of industrial metals. A report from Seeking Alpha stated that aluminum topped the chart with a gain of 30.7%, driven by China’s commitment to cutting down excess production in order to combat pollution. The Chinese government’s ban on imports of scrap metal benefitted copper, which gained 29.4% in 2017, as the chart above shows. Other base metals—like lead, nickel, and zinc—benefitted from lower inventories.

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Overall, China’s fiscal stimulus plan, which focuses more on infrastructure, contributed to the base metals’ performance in 2017. Base metals’ continued performance could benefit base metal producers like Teck Resources (TCK), Rio Tinto (RIO), BHP Billiton Limited (BHP), Glencore (GLNCY), and Vale S.A (VALE).

Like gold mining companies, base metal producers worldwide are also focusing on using capex efficiently and generating free cash flow to reward stakeholders through dividends.

During its half-yearly results[1. For the period ended December 31, 2017], BHP Billiton Limited (BHP) highlighted its capital allocation strategy for 2018, as the chart above shows. The company announced that it generated $4.9 billion in free cash flow, driven by a strong operating performance and higher commodity prices. It used this cash to reduce its net debt and return to shareholders through dividends.

En+ Group, a leading aluminum and power producer, recently announced that it generated strong free cash flows of $1.2 million in 2017, driven by its strong operational performance and robust capital allocation network. As part of its dividend policy, the company returned $394 million to shareholders as dividends for 2017. As part of its cash distribution policy, Glencore (GLNCY) announced a $2.9 billion shareholder distribution that comprises a fixed $1 billion component and a variable component of $1.9 billion, which is 36% of free cash flow generated by the company’s industrial assets in 2017.

The PowerShares DB Base Metals ETF (DBB), which tracks base metals like copper, zinc, and aluminum, has risen 24% in 2017 and 5% in 2018 year-to-date.

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