Windfall Tipped from Resource Coffers

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"Global mining industry will be sitting on $72B by year-end 2012."

Shareholders could be the winners if miners increase dividends to reward investors.

Citi Analyst Craig Sainsbury said research indicated the global mining market would be in a net debt position of $4B by year-end 2011 and a net cash position of $72B by year-end 2012.

"We estimate the industry to move into a net cash position early in 2012, which is a new phenomenon for the sector," he said. "With strong commodity prices and solid balance sheets, the market is focusing on what the miners do with the cash stockpile. If history is a guide, capex will likely ramp-up but we doubt we will see big-ticket capital management programs from the sector."

For the global sector, capex has accounted for 60% of the cash spend in the past five years and 46% of operating cashflow.

Sainsbury said that next year the global sector was tipped to reach a record $92B of capex, but it was time to increase shareholder returns. "Cash returns to the sector have been almost nonexistent. And on a global-sector basis, any buybacks from miners have been dwarfed by the number of equity raisings and IPOs," he said.

Since 2005, total cash returns to shareholders has been $63B, just 11% of the total net cash spend for the sector.

"While the market is focusing on acquisition and potential capital management plans, we believe the humble dividend is the area miners need to focus on," Sainsbury said.

Citi's analysis shows that dividends, as a percentage of operating cashflow, free cashflow and shareholder equity, are forecast next year to be almost half of what they were in 2006.

"We believe that an ongoing way for miners to increase their cash returns and offset the big cash buildup is to lift their dividend payout levels," Sainsbury said.

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