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Cash-rich miners assay their prospects

www.breakingviews.com

Acquire, distribute or hoard. That is the choice facing global mining companies such as Rio Tinto and Xstrata. High commodity prices may be providing them with a lot of cash. But what are they to do with it? 

The right answer depends on how long prices are likely to stay high.

Xstrata and BHP Billiton are giving cash to shareholders, but perhaps only temporarily. If prices stay high for much longer, acquisitions are likely to gain favour.

Mining is a usually a pretty tough business. Investment is huge, competition is global and demand grows more slowly than GDP – the service economy does not need a lot of steel and copper. It is possible to prosper – Rio Tinto has reported a return on equity of 17% or more for the past decade – but only by having low-cost resources and doing nimble work when it comes to acquisitions and divestitures.

Prices reach record highs

This year has been very unusual. The price of almost every commodity has risen to a record level. There is even a shortage of coal, when there is usually a massive oversupply.

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