(Bloomberg Gadfly) — The world’s miners went on one hell of a binge five years ago, and they’ve been dealing with the hangover ever since. Even the worst overindulgence passes into memory eventually, though, and last week the industry emerged blinking into a bright new day.
At BHP Billiton Ltd., Vale SA, Rio Tinto Group and Anglo American Plc, combined net debt fell by almost $15 billion between June and December, compared with a $3.7 billion reduction across the previous three-and-a-half years. Free cash flow in the December half rose more than sevenfold from a year earlier, to its highest level since 2011. Capital spending dropped to the lowest point in a decade.
Executives rolling out these results did their best to project an ascetic air. Having set fire to a mountain of capital during the boom, they were keen to remind shareholders they were now reformed characters.
The executives undoubtedly are sincere. But make no mistake: Should commodity prices remain buoyant, this party will be back on in a year or so. The reason is embedded in the nature of the industry. If you were trying to think of a recipe for the undisciplined allocation of capital, you’d probably design a business with vast expenditure needs combined with highly variable but frequently extraordinary profits. Like a mining company.
While digging up rock may not seem glamorous, it can be fantastically lucrative. On long-term average operating margins, the world’s big miners are often more profitable than the owners of Cartier, Gucci, Givenchy and Tiffany:
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