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.
But with iron ore prices having
fallen 8 percent since then to hover near five-year lows, BHP and Rio may be
even less likely to start handing back excess cash in February, Standard &
Poor's analyst May Zhong said.
"The lower iron ore prices
will reduce their flexibility to do any significant capital return," Zhong
said.
She still expects a small
recovery in iron ore prices in 2015, but not above $100, and sees BHP and Rio
being in the strongest position to withstand the tough market.
DEBT WORRIES
The prospect of buybacks is a
luxury only the major miners can consider with iron ore in the doldrums.
At the other end of the spectrum,
investors and S&P are concerned about more heavily geared miners like Anglo
American , for whom iron ore is the biggest earner, as well as Australia's no.5
producer, Atlas Iron Ltd and U.S. miner Cliffs Natural Resources Inc .
Anglo American is close to
completing its long-delayed $8.8 billion Minas Rio mine in Brazil, which is
expected to produce 11-14 million tonnes next year. The company declined to
comment on whether it is looking at ways to shore up its balance sheet in light
of the weak iron ore market.
In Australia, investors are most
worried about Australia's fifth-largest iron ore producer, Atlas Iron Ltd , the
most heavily shorted stock on the Australian market with close to 16 percent of
its shares sold short.
Rival Arrium Ltd moved to raise
$680 million through a share sale this week, and analysts and investors said
Atlas may consider selling stakes in its mines or holding back on planned
expansions to ease pressure on its balance sheet.
"I dare say they'll come up
with some sort of joint venture solution," said Phillips. "They've
got a bit of room to move."
Atlas, which analysts estimate is
producing at a loss with iron ore prices below $86, declined to comment on what
impact the weak iron ore price is having on its balance sheet.
One company still weathering the
downturn is world no.4 iron ore producer Fortescue Metals Group , which is in a
much stronger position than it was two years ago, when iron ore prices briefly
dipped below $90 a tonne.
Once carrying more than $10
billion in debt, Fortescue took advantage of a spike in iron ore prices to
accelerate its debt repayments and expand its output to 155 million tonnes a
year, slashing its operating costs.
"We're pretty comfortable
with where Fortescue sits at the moment," said Fitch credit rating analyst
Vicky Melbourne.
Source: Metal .com