Ask not what Grange's dividend policy can do for you, ask what you can do for Grange's dividend policy!
The issue is not what is Grange's dividend policy (I understand it is 25% of free cashflow although I have not found this stated in a document released to the ASX). Yes applying this dividend policy to the past 6 months equates to maybe a 0.5c dividend. That is not the issue.
The issue is the dividend policy should reflect the capital needs of Grange, with surplus capital being returned to all shareholders tax efficiently.
If there are sound capital projects that deliver attractive returns on incremental investment and/or reduce operational risk then the Board should approve these investments. I am not saying past investment has been unsound. I do note that according to the last quarterly report the concentrate and pellet plants are both achieving record production rates which is impressive given the infrastructure is 50 years old.
I am saying that disclosure is substandard and the Board and management should better inform current and prospective shareholders of current and future capex requirements, the assumptions justifying these capex requirements, and the expected financial returns and operational benefits.
We have invested in a single mine with old infrastructure (albeit a lot has been upgraded recently) that is operationally complex and relatively high cost. If we need to invest most of our cashflow in the mine and infrastructure to support a long mine life and generate appropriate risk adjusted returns over an extended time horizon then it is money well spent and we should be happy to receive a small dividend/payout ratio for the near term time horizon.
However, a blanket dividend policy of 25% free cashflow makes no sense. Firstly free cashflow is after whatever capex is required. Retaining 75% of free cashflow when we have a cash balance of $168m already is inefficient. Yes some cash should be retained for working capital and contingencies, but not $168m plus 75% of future cashflow.
A much higher dividend payout ratio/dividend will cause Grange's share price to more accurately reflect fair value.
Why cannot 100% of genuine free cashflow (after appropriate capex) be returned to shareholders through dividends, buybacks and/or capital returns, as well as a portion of the current cash balance?
I know there is an argument cash needs to be retained for Southdown. Let's face it, the project requires billions, hasn't been developed in much more favourable iron ore market conditions and has not attracted a strategic partner in over a decade. I doubt it will ever be developed but even if it is developed one day, retaining cashflow from Savage River for this small future probability is not maximising shareholder value or the share price of Grange. I actually think Southdown should be separated into another company but that is a separate discussion.
For now, I highly encourage all shareholders to stand up and help yourself. Contact the company and demand an explanation for the current dividend policy and ask why it is appropriate and in the best interests of all shareholders. Demand more disclosure of current and future capex requirements - it is our capital the Board is investing. If projects like the pit rim crushing and conveyancing project are sound and require capital investment then the Board and management should invest, but tell us what, how much and why. However if there is no need for the company to retain our capital, then return all surplus free cashflow to all shareholders fairly and efficiently. Do not continue to retain so much surplus cash and certainly do not let the cash balance continue to increase.
We have all waited for the current favourable operating environment where the mine and infrastructure is performing well and pellet prices are high. Now is the time we should be rewarded with the maximum possible dividends and capital returns to all shareholders.
Just my opinion
Monty
GRR Price at posting:
18.5¢ Sentiment: Buy Disclosure: Held
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