[miningmx.com] – BHP Billiton’s decision earlier this week to cut capital outlays once again – translating into a 40% reduction in the years between 2013 and 2016 – could also be a signal to shareholders to trim their expecations about returns.
“Against this backdrop [of new capital cuts] surely buybacks are officially off the agenda,” said Macquarie Research following BHP Billiton’s investor update. It added that the group’s capital management equation looked increasingly stretched.
The feeling among analysts is that opex and capex cutting among the diversified miners is not yet over if, as they expect, the aim is to boost dividends.
Hunter Hillcoat, an analyst for Investec Securities in London, said the only way significantly high dividends could be returned to shareholders is to allow debt to pay for it, or for another round of capital project cuts.
“As we head into an uncertain future, we feel that neither option is particularly attractive,’ said Hillcoat in a research paper dated November 4. “The result is that shareholders awaiting windfall returns are likely to be disappointed,’ he said.
That’s potentially devastating news for new management of BHP Billiton and Rio Tinto which have ridden into their positions on the back of austerity cuts delivered like castor oil to an eight-year old.
BHP and Rio Tinto, for instance, have delivered combined operating cost savings of $10bn a year since 2012 while combined capital requirements have come down about $16bn from $39bn since 2012.
Yet these efforts have been thwarted by falling commodity prices with iron ore declining 43% in price year-on-year, coking coal some 24% weaker and similarly hefty price declines for thermal coal (-20%) and copper (-7%).
Jeff Largey, an analyst for Macquarie Research, noted similar constraints on Glencore in a recent research note. Although the Swiss-based company offered “compelling’ 2015 share earnings growth compared to its peers “… the conviction behind that earnings growth and free cash flow yield rests heavily on commodity prices that continue to suffer from comfortable supply exacerbated by weaking demand and a strong US dollar’.
Goldman Sachs has a sell on Rio Tinto based on the its exposure to iron ore production – which is about 70% of earnings – adding that although it would pay a dividend, the likely of a special dividend was remote.
“Our core thesis on the stock remains the same – we don’t see the company generating sufficient cash flow after dividends from the 2014 – 17 and as such we see limited prospect of any special dividend or share buy-back,’ it said.
