Deflation Roll Call—-Mining Giant BHP Takes $7.2 Billion Write-Down, Faces 50% Dividend Cut

By Rhiannon Hoyle at The Wall Street Journal

SYDNEY— BHP Billiton Ltd. said it is committed to protecting its balance sheet amid a sharp downturn in world commodity markets, as expectations build about the miner preparing to cut its dividend.

The Anglo-Australian mining giant has faced growing speculation it may have to cut its payout by as much as half this year as it grapples with plunging resources prices and the fallout from one of its worst mining disasters, a deadly dam burst at a mine operated by Samarco Mineração SA, a 50-50 joint venture with Brazil’s Vale SA.

Last week, BHP also announced its largest write-down ever, a roughly US$7.2 billion pretax charge against its U.S. onshore energy assets as oil prices slumped below US$30 a barrel for the first time in more than 10 years.

Only 18 months ago, the market was speculating about the possibility of a major share repurchase by the company to reward investors. Now, even maintaining its dividend, a US$6.6 billion annual burden on its balance sheet, appears a stretch.

Cutting investor payouts is a measure big companies are loath to take, for fear of alienating important shareholders. It is particularly difficult when options for growth are limited.

“We continue to cut costs and remain focused on safely improving our operational performance to enhance the resilience of our business,” Chief Executive Andrew Mackenzie said Wednesday.

“In this environment, we are also committed to protecting our strong balance sheet so we have the financial flexibility to manage further volatility and take advantage of the expected recovery in copper and oil over the medium term,” he added.

In August, BHP recorded its worst annual earnings result since 2003. Slackening demand from China, as miners ramp up production from mines planned when prices were booming, has hit prices of nearly every commodity, including coal, iron ore, oil and copper, which are BHP’s core products.

BHP’s share price has since slumped to its lowest level in more than a decade.

That’s been exacerbated by uncertainty over the Samarco disaster. Considered one of Brazil’s worst environmental disasters, the Nov. 5 incident killed at least 17 people and triggered a criminal investigation and roughly US$5 billion civil lawsuit by authoritiesagainst Samarco and its parent companies.

On Wednesday, it also led BHP to pare its projection for global iron-ore production in the year through June, to 237 million metric tons from an earlier forecast of 247 million.

Investors have urged BHP to clear the air on its plans for future dividends. They say uncertainty over the outlook has been a key driver in sending the miner’s share price sharply lower.

Although BHP might be punished initially by yield-hungry investors, a cut to the dividend would likely be rewarded as prudent in the longer run, Pengana Capital fund manager Ric Ronge said.

Barclays said the miner is very likely to cut its dividend in half, and would surely be considering now whether this should be done as soon as next month.

Morgan Stanley anticipates a roughly 40% cut. Even a reduction of that magnitude would leave BHP with an attractive yield and strong balance sheet compared with its peers, the bank says.

Glencore PLC and Anglo American PLC have already slashed their dividends after their stocks plunged on concerns about cash flow and debt. Anglo American recently said it would have to shed more than half its global workforce in the coming years.

Even Anglo-Australian rival Rio Tinto PLC, which has largely outperformed its peers during the commodities downturn, is feeling the strain. Last week, the company said it is implementing a salary freeze in 2016 and urging staff to cut back on all nonessential activities to preserve cash, although it declined to comment on the outlook for its own dividend.

On Tuesday, as Rio Tinto reported record annual iron-ore shipments for 2015, Chief Executive Sam Walsh acknowledged the “challenging market backdrop” and said the miner would “focus on disciplined management of costs and capital to maximize cash-flow generation throughout 2016.”

Sharp falls in commodity prices have put “pressure on the whole resources sector,” BHP’s Mr. Mackenzie said. The combined market value of the world’s five largest minerals exporters—BHP, Rio Tinto, Glencore, Vale SA, and Anglo American—has roughly halved since the start of 2015.

BHP first signaled it may revise its long-held pledge to maintain or increase dividends year-over-year at an Australian shareholder meeting in November, as it grappled with the fallout from a dam burst at an iron-ore mine in Brazil only two weeks earlier.

Chairman Jacques Nasser told that meeting that BHP had endured “one of the most difficult” years in its 130-year history, and assured investors that “the one thing we never risk is the strength of the balance sheet through the cycle.”

Mr. Mackenzie, who had previously stood staunchly behind the decadelong progressive dividend policy, said at the time the miner expected to comment further on its plans for the policy in February. BHP is scheduled to release its midyear earnings report on Feb. 23.


Source: BHP Lowers a Forecast as Investors Fear a Dividend Cut – The Wall Street Journal