Fitch: More Dividend Cuts Likely in Mining Absent Price Recovery
28 April 2015 - 02:51AM
Business Wire
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
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