Mining’s ‘Cash Machine’ Promise Fades as Prices Crater – by Jesse Riseborough (Bloomberg News – December 8, 2014)

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BHP Billiton Ltd. (BHP) and Rio Tinto Group run the risk of taking on additional debt as a plunge in commodity prices threatens their ability to keep a promise of returning more cash to shareholders.

As the world’s two biggest mining companies reiterate pledges to bolster returns, a near five-year low in iron ore and coal prices raises the specter both will need to borrow to meet their dividend commitments. Along with rivals Glencore Plc (GLEN) and Vale SA (VALE5), the two companies are largely responsible for the supply glut that’s putting downward pressure on prices.

While investors demanded higher industry returns after $1 trillion was spent on acquisitions and new mines in the past decade, the prospect of companies “robbing Peter to pay Paul” doesn’t sit well with Clive Burstow, an investment manager at Baring Asset Management, which oversees $60.5 billion.

“If they start leveraging up the balance sheet just to give investors back some money, I’m not a great fan of that,” said Burstow, who has been reducing holdings of BHP and Rio this year. “That effectively means they are banking on there being higher commodity prices in the future.”

If current commodity prices prevail, BHP faces an estimated $5.4 billion shortfall to meet a forecast $6.6 billion dividend payout for the fiscal year ending June 30, according to Liberum Capital Ltd. mining analyst Richard Knights.  That means the prospect of any additional return through a buyback is “very low,” he said. Rio’s estimated dividend shortfall is $1 billion next year, Knights said.

High Hopes

Macquarie Group Ltd. also projects a shortfall if current prices prevail, with a gap of $2.4 billion for BHP in fiscal 2015 and $1.5 billion for Rio. Anglo American Plc is also facing a cash shortfall for its projected dividend next year, according to Macquarie.

“We started this year with very high hopes of big shareholder returns, big share buybacks,” said Jeff Largey, a mining analyst at Macquarie in London. “There’s just not a lot of excess capital around for these companies to shower on shareholders.”

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