Fitch Ratings expects more mining dividend policies will be up for review should commodity prices remain at current levels.

Miners are generally bought for share price appreciation over dividend yield but aggressive expansion in the face of slowing demand growth has eroded share prices. Given the reversal of fortune, mining companies cut investment, worked to drive productivity gains, and put non-core operations up for auction but are loath to cut dividends. This reluctance can be a drag on credit quality in the face of weaker cash flows, high fixed costs, high barriers to exit, and the long-term nature of the assets

Dividends were cut during the global financial crisis, especially at metals companies or companies that made ill-timed acquisitions, to preserve liquidity. For example, both United States Steel Corporation and Alcoa, Inc. raised equity and cut dividends early on in the global financial crisis to shore up liquidity given exposure to the automotive and construction industries. Both Teck Resources, Limited and Rio Tinto plc cut dividends and raised equity to reduce debt raised to finance acquisitions just prior to the crisis. Dividends were cut during the previous weak metals cycle sparked by the 1997 Asia crisis following a period of heavy investment. In particular, Newmont Mining cut its dividend in 1997 and Phelps Dodge cut its dividend in 2001.

Since the global financial crisis, miners built substantial liquidity given debt and equity raisings as well as recovery in commodities prices and self-help measures. But this has limits.

This cycle has seen average first quarter 2015 prices for iron ore and hard coking coal down more than 60% and copper and nickel prices down roughly 30% from the average of 2011. At the same time, the Euromoney Global Mining Index is down over 50% and some miners remain committed to keeping the dividends even though some of these are now yielding over 5% and account for a substantial portion of earnings.

This year has seen Cliffs Natural Resources Inc., First Quantum Minerals Ltd., Freeport McMoRan Inc., Peabody Energy Corp., Teck Resources Ltd., and Vale S.A. cut dividends and generally questions about dividend cuts usually precede actual cuts by at least one earnings call.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch RatingsMonica BonarSenior DirectorCorporates+1 212-908-0579orKellie Geressy-NilsenSenior DirectorFitch Wire+1 212-908-9123Fitch, Inc.33 Whitehall StreetNew York, NY 10004orMedia Relations:Elizabeth Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com