Miners, Once Dividend Darlings, Strike Vein Of Austerity

   (FROM THE WALL STREET JOURNAL 2/13/16) 
   By Juliet Samuel 

A dividend cut this week by one of the world's biggest mining companies brought home a new reality for investors: Mining stocks can no longer be counted on for income.

Rio Tinto, the Anglo-Australian miner, on Thursday scrapped its long-standing promise to maintain or increase its dividend every year and adopted a more flexible policy of tailoring its payout to circumstances.

The move surprised investors, coming from a company once seen as one of the mining industry's simplest, steadiest and biggest operators. Rio Tinto's shares fell Thursday but bounced back in a rally Friday, up 8.4% in London.

Andrew Lapping, deputy chief investment officer of South Africa-based fund Allan Gray, said it should never have become normal for companies in a highly cyclical industry like mining to promise an ever-increasing, or "progressive," dividend.

"The whole progressive dividend was an absolute joke," Mr. Lapping said. In a deteriorating market environment, he said, "all you're doing is borrowing from the banks and giving to shareholders."

He said the concept, which was meant to instill capital discipline, has been firmly discredited by years of overinvestment and expensive acquisitions across the industry.

David Cumming, head of equities at Standard Life PLC, said holding mining shares is now a waiting game. "It doesn't really matter that it's not a dividend story anymore because the stocks are all down [so much]. It's more about are we going to make any money out of this again?" he said. Standard Life is a major shareholder in several large mining companies, including Rio Tinto.

Rio Tinto is just the latest mining company to decide it can no longer afford a generous payment to its shareholders. The industry is suffering a hangover from years of heavy investment spurred by low interest rates and the excitement sparked by surging Chinese demand. Since the turn of the decade, companies have built a generation of supermines around the world, pushing up production.

But as China's economy slowed, the new capacity has sent commodity prices tumbling, eating into what used to be some of the richest dividends available. Freeport McMoRan Inc., Glencore PLC, Cliffs Natural Resources Inc., Peabody Energy Corp. and Vale SA have all cut dividends. BHP Billiton, one of Rio's main rivals, is expected to follow.

BHP and Rio Tinto are among the most widely held mining stocks among dividend funds, according to Liberum Capital analyst Ben Davis.

Investors have generally been supportive of the dividend cuts, as long as mining companies don't use the cash they retain to keep expanding production. Most have scrapped ambitious expansion plans, putting on ice billions of dollars of extensions and new mining projects and instead paying down debt.

One major mining company CEO said he is content to wait out the drought, until weaker competitors fail, supply comes out of the market, and prices go back up.

(END) Dow Jones Newswires

February 13, 2016 02:47 ET (07:47 GMT)

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