Anglo American (LSE: AAL) was going to have to cut its dividend sooner or later, so it’s better it acted sooner rather than let the uncertainty drag on into next year. Unfortunately, all it has done is sharpen the focus on those FTSE 100 mining giants that have yet to cut their dividends, BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO).
Cuts, cuts, cuts
Rather than the end of the story, this is beginning to look like the start of a trend for miners. With share prices plunging, juicy yields were the main reason to stay true to the commodity sector but now these are being squeezed dry. Anglo-American tried fighting the inevitable with cost slashing and asset disposals, but had to give way in the end. The yield hit an unsustainable 14% by the time it acted, announcing last week that it would axe its workforce by more than half from 135,000 to 50,000, and suspend dividend right to the end of next year.
That will save Anglo American about £1bn a year, money it desperately needs to survive lower prices. Even when the dividend does return, it will no longer be progressive, something management claims is unaffordable in the notoriously cyclical mining sector.
Triple Trouble
Even more worryingly for BHP Billiton and Rio Tinto, by slashing ÂŁ1bn from capex and canning plans for new mines it’s effectively saying there is enough commodity supply today to last for years to come.
Rio Tinto quickly followed Anglo American’s lead to announce $1.5bn of capex cuts by the end of next year. There was no talk about cutting the dividend, but markets seem to be pricing that in, with the share price down 10% in the last week. That’s the problem when the dividend comes under pressure, the share price collapses as well.
BHP Billiton has also been burning through cash and looks even more vulnerable. Its share price is down more than 12% in the past week. Citi reckons it will burn through around $3bn a year. With BHP hit by institutional downgrades, its payout must surely be on borrowed time.
In A Hole
The situation at BHP Billiton and Rio Tinto isn’t quite as drastic as at Anglo American. Their yields haven’t yet hit double digits, but BHP is close at 9.23%, so you can draw your own conclusions. Rio currently yields 7.15%. Commodity prices continue to fall, with iron ore hitting a seven-year low of around $40 a tonne. Both companies are clearly at the sharp end of a cyclical shift in China, a shift that only looks set to sharpen.
The mining sector is notoriously cyclical. At some point, all this cost slashing will lead to supply shortages and force up prices again, but it would take an optimist to suggest we’re at that point now. Larger operators appear to be following the Saudi strategy of maintaining high-margin production to drive out low-margin rivals and hang onto market share. Commodity prices may have further to fall in the new year. Unless they recover sharply, I fear that BHP Billiton and Rio Tinto’s dividends will fall as well.