Anglo American seen likely to cut dividend as metal prices fall
The rout in commodity prices is putting pressure on credit ratings and dividends across the mining sector.
JOHANNESBURG - Anglo American is likely to be the next mining firm to follow Glencore's example in cutting its dividend to help contain debt levels and preserve cash amid a global commodity market slump, analysts and bankers said.
Glencore, weighed down by net debt of $30 billion and hurt by declines in its key products of copper and coal to six-year lows, this week suspended dividends and said it would sell assets and raise $2,5 billion in a share sale.
The rout in commodity prices is putting pressure on credit ratings and dividends across the mining sector, prompting reductions in capital expenditure, operational costs and jobs.
Among Glencore's big mining rivals, Rio Tinto and BHP Billiton have both reaffirmed their commitment to paying a dividend, but Anglo is seen as more vulnerable due to its higher-cost iron ore assets, loss-making platinum assets and slower than expected progress with its restructuring plans.
"We have seen Teck cut their dividend, we have seen Glencore cut their dividend and I think we will see Anglo American cut their dividend," Bernstein Research analyst Paul Gait said.
Canadian miner Teck Resources announced a 67 percent cut in its dividend in April, citing weakening Chinese demand for steel-making coal.
"Given the set of commodities that they (Anglo) have got, their ability to pay a dividend without raising their debt is harder than for any other mining company," said Gait, a view echoed by two sector bankers.
Anglo spokesman James Wyatt-Tilby said the company board made dividend decisions every six months, with the next review set for February. He gave no further details.
Anglo, the fifth-biggest diversified global mining group by stock market capitalisation, said in July it would cut about 6,000 jobs and might put up more assets for sale as the slump in metals prices dragged its share price to 13-year lows.
Anglo's total borrowings were at nearly $19 billion at the end of June, putting its debt to equity at 0,86
times, according to Thomson Reuters data. This compares to a debt to equity ratio of 0,59 times for Rio Tinto and 0,48 times for BHP Billiton.
Anglo's big exposure to labour-intensive and loss-making platinum assets has been of particular concern to investors.
The company's platinum subsidiary Amplats said on Wednesday it had sold its labour-intensive South African Rustenburg mine, which produces about a third of its annual output, to bullion producer Sibanye Gold for R4,5 billion ($326 million).
Sector bankers said Anglo needed to show it was sticking to its plan to trim its debt and the deal with Sibanye showed the company was committed.
Anglo posted a steep fall in first-half profit and said the next six months could be even worse, but it still declared an interim dividend.
"They're reviewing what to do on their final one. They may decide against paying one," a London-based sector banker on the advisory side said.
Anglo shares plunged last month to 649 pence, their lowest in 15 years, but have since staged a slight recovery. They were trading down 2 percent at 727 pence as of 11h00 GMT.
But the shares, trading at 11,5 times forward price-to-earnings ratio, are at a 16 percent discount to its mining peers.
Glencore's decision to suspend its dividend was well received, with its shares also recovering from record lows.
"Clearly Glencore has set a precedent. The reality is that you've got to have strong confidence in commodity prices to be able to have a progressive dividend," another banker said.
"Just paying dividends for the sake of it, increasing net debt to pay a dividend, is just stupid."
Ratings agency Fitch said Glencore's decision highlighted the benefits of a flexible dividend policy.
"This option would not be open to Rio or BHP unless they dropped their progressive dividend policy, which would be difficult because of its popularity with shareholders and because of the emphasis that both companies have put on the policy," Fitch said.
Under a progressive dividend policy, dividends gradually increase as a percentage of profit.
Fitch said Rio and BHP have been able to stick to their dividend policies, despite the fall in iron ore prices, because they cut costs often more than their own targets, but it warned that further cost reductions would be much harder to achieve.
BHP last month reaffirmed its pledge never to cut its dividend and lowered its target for capital spending for the year to June 2016 to help meet the promise.
"Our commitment to our progressive dividend is resolute," Chief Executive Andrew Mackenzie said last month. "It has withstood many previous cycles and is a key differentiator relative to our peers."
Keeping to board policy, Rio lifted its interim dividend by 12 percent to $1,075 per share, despite a dismal outlook for commodities. It pledged $1 billion in cost cuts this year.
Both BHP and Rio said their positions on progressive dividend policies had not changed.