Skip to main content

Rio Tinto froze all non-union salaries around the world last week to help cope with falling metal prices.

REUTERS

Two giants of the global mining industry, already beset by plummeting metal prices, now face a new challenge – preparing their shareholders for sharply lower dividends.

BHP Billiton Ltd. and Rio Tinto PLC have both said in the past that they are committed to the payouts, but most observers doubt that sticking to the dividends is practical in today's bleak environment for commodity producers.

At their current share prices in London, BHP's dividend works out to a yield of more than 14 per cent, while Rio's is equivalent to a payout of nearly 10 per cent.

Story continues below advertisement

Those are remarkably high yields for companies with investment-grade credit ratings and reflect the degree to which the share prices of the two miners have faded since the height of the commodity boom. The losses show no signs of letting up: BHP's stock declined 19 per cent in the first two weeks of this year, while Rio's is off 17 per cent.

In theory, slashing dividends should have no further effect on the miners' share prices. Financial logic says a company can't increase its economic value by paying out more of its cash.

However, cutting the payouts would qualify as a deeply symbolic retreat and may put off yield-hungry investors. Both companies have prided themselves in the past on "progressive" dividend policies in which they vowed to maintain or increase payouts to shareholders. To slash the cash transfers now would be to admit that there is no sign of any imminent improvement.

Despite the implications, BHP, the most valuable miner in the world in terms of market capitalization, may have little choice but to cut its dividend if it wants to maintain its credit rating.

Plunging prices for iron ore and copper have already smacked the company's bottom line. Then, last week, it announced it was taking a $7.2-billion (U.S.) writedown on the value of its U.S. oil and gas assets, which it acquired in 2012 for more than $20-billion.

That writedown is BHP's largest yet in the commodity downturn and prompted speculation that the company will trim its dividend, perhaps as early as next month, when it announces half-year results. "We believe they are very likely to cut their dividend in half," Barclays analysts wrote.

Rio's outlook is also challenging. Last week, it froze all non-union salaries around the world to help cope with falling metal prices.

Story continues below advertisement

"Late last year, we saw market prices continue to rapidly fall," chief executive officer Sam Walsh wrote in an e-mail to employees that was obtained by the Australian Mining magazine. "What we see ahead is very sobering."

Rio depends heavily on sales of iron ore, and prices for that commodity continue to slide. Sticking to its current capital expenditure plans, while maintaining the dividend, would mean increasing debt at a rapid clip over the next two years.

"The market is quite rightly questioning whether Rio's dividend is sustainable," Heath Jansen of Citigroup wrote in a report last week. However, he believes that the miner will pull back on capital expenditures as a first step to economizing on cash and will maintain its progressive dividend policy for now.

Dividend cuts at either miner may at long last prompt a wave of downgrades by analysts, who have been remarkably slow to warn of the deterioration in the mining sector over the past two years.

Mr. Jansen noted in a report that "buy" ratings remain far more common than "sell" ratings for most of the major diversified miners. Consensus target prices are far ahead of current stock prices.

In one striking deviation from common sense, there are no "sell" ratings for Freeport-McMoRan Inc., the giant U.S. miner that has lost 90 per cent of its value since January, 2014.

Story continues below advertisement

"It would appear as though the downwards move in equity prices are already a few steps ahead of consensus ratings and target price downgrades," Mr. Jansen wrote.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter