UK miners have performed well over the last year, returning 13.4% against the FTSE-All Share’s meagre return of 1.5%. Accelerating iron ore prices this year has driven this outperformance and the top chart illustrates that this relationship holds over long periods. In the absence of further supply shocks, we expect iron ore prices to moderate for the rest of the year alongside China’s economic slowdown. China’s demand for iron ore is critical to the success of UK miners and with the downturn in our China leading economic indicator, this points to less supportive conditions for these companies.

We observe that iron ore prices drive dividend payouts and buyback activity, amplifying the cyclicality of these stocks. This is great for shareholders in the context of disaster-driven price movements this year including the BHP train derailment, Rio Tinto’s port facility catching fire and the Australian cyclone. However, this risk is also magnified on the downside, and currently we see earnings just above water to support dividend payouts (bottom-right chart). So while the current dividend yield of 7% looks attractive in a yield-hungry world, we see this under threat over the longer-term and recent price movements have provided a useful opportunity to exit.

(Click on image to enlarge)

Source: Bloomberg, Macrobond, Variant Perception