MELBOURNE, Sept 17 (Reuters) – Sagging iron ore prices raise the prospect the world’s biggest miners will shelve plans to return excess cash to shareholders in February, despite promises to investors who had hoped to reap the benefits of two years of austerity.
Stung by slower growth in China, global miners have reined in expansion plans and brought in new management to sell assets and drive their mines harder, raising hopes that BHP Billiton alone could hand back up to $8 billion to investors.
In the August reporting season, Glencore kicked off the expected party with a $1 billion share buyback, world No. 2 iron ore miner Rio Tinto flagged it would be in a strong position to return capital in February, and BHP said a move was “close”.
But iron ore prices have collapsed to five-year lows since then, thanks to the major miners flooding the market with new supply and high-cost miners in China continuing to produce, defying expectations the market would bottom around $90 a tonne.
If prices remain below $90 for the rest of the year, BHP and Rio, both looking to keep their single ‘A’ credit ratings, would be hard-pressed to return capital to shareholders, beyond raising their dividends, debt and equity analysts said.
“At the moment, there’s a lot of cash flow at risk relative to history because of commodity price volatility, not just in iron ore, any spot price exposure. You can’t pre-emptively give back cash in this environment,” said Paul Phillips, a partner at fund manager Perennial Growth Management.
BHP and Rio would be focused on maintaining conservative balance sheets, he said, with both companies slashing costs, cutting project spending and paring debt to help weather the downturn in the price of iron ore and other commodities.
Iron ore has fallen nearly $50 a tonne so far this year. Every $1 drop in price would wipe $135 million off BHP’s bottom line for the year to June 2015.
“We’re not pressuring them for capital returns per se. It’s got to be sensible given the environment we’re in,” said Ross Barker, managing director of Australian Foundation Investment Co, one of the top five investors in BHP’s Australian shares.
BHP CEO Andrew Mackenzie conceded after releasing annual results in August that the board had decided not to endorse a share buyback as it was being cautious in the face of volatile commodity markets.
“Looking forward with our current configuration today, our desire to remain a solid ‘A’ credit rating business and our view of future markets, we think it would be premature to start right now, but we are getting close,” he told reporters in London.
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