FTSE 100 copper mining heavyweight Antofagasta (ANTO) and gold and silver player Fresnillo (FRES) today kicked off what will be a busy reporting week for the mining sector. Their respective top and bottom-of-the board share price performances betrayed a tale of two cities.
Antofagasta, up 4.5% at £11.44 and the best pleasing constituent of the FTSE 100, revealed better-than-expected profits for 2012. This prompted analysts to forecast that the 77.5c special dividend declared, in addition to 21c of ordinary distributions, will be repeated next year.
By contrast, Fresnillo's full-year figures disappointed, reflecting pressure from a lower silver price, lower grades and higher depreciation of exploration expenditures. A total 57.9c of dividends was a substantial cut to last year's 103c leaving the market wondering what might happen in 2013.
The mining sector has become increasingly important for UK investors with a 12.3% FTSE 100 weighting making it the third most significant segment after banks (15.3%) and oil and gas producers (15.6%).
Its trailing yield of 2.8% is lowly by market standards but the sheer weight of the sector's market capitalisation, and absence of yield from two of the UK's key FTSE 100 banks, means it is highly significant for income-starved UK investors.
It accounted for £1 in every £12 of UK equity income paid in the UK last year, versus £1 in £10 from the banks, finds Capita Registrars.
In light of the focus on mining dividends it is therefore little surprise that the market reacted in such divergent ways to Antofagasta and Fresnillo. Unless precious metal prices improve it seems investors will continue to view the latter's 4% above-sector prospective dividend yield with suspicion.
Meanwhile analysts appear convinced Antofagasta has mitigated cost pressures which have hit the whole of the sector. Ahead of the numbers the copper giant already told analysts to expect higher costs at its flagship assets, Los Pelambres and Experanza.
Peter Mallin-Jones of Canaccord Genuity comments that 'without substantial capex uplift or copper price reductions' a 'likely build up of net cash through 2013 increases our conviction that a similar large special dividend is likely to be announced at the 2013 results'. He has pencilled in 100c.
End of super cycle
For what is a high beta segment of the market the mining's poor capital performance since the beginning of 2013, against a rally in the wider markets, has prompted some to call the end of a 'super cycle'.
But the mining team at Liberum Capital sees value and in a note published this morning commented: 'We conclude that headwinds of a poor quality cyclical recovery in China fears of a supply wall in copper and iron ore, and a transient fund sell-off in exchange traded commodities are not collectively harbingers of the beginning of another 20 years of sub-par returns that some are speaking of.'
Liberum notes that following a10% underperformance versus the FTSE All-Share since the start of 2013, the first period of negative correlation with the market in five years, mining's dividend yield is at a six-year high relative to '10-year bonds'.