(The following statement was released by the rating agency)
LONDON, May 07 (Fitch) Rio Tinto and BHP Billiton's commitment to progressive
dividend policies limits their options for cutting cash outgoings and makes it
harder to maintain positive free cash flow in the current soft commodity price
environment, Fitch Ratings says.
Most other mining companies have a discretionary dividend policy or one based on
a percentage of profits, which provides valuable flexibility when operating in a
sector as cyclical as mining.
Progressive policies, which in BHPB's case means a steadily increasing, or at
least stable dividend, are attractive to equity holders and have not been
problematic in the strong commodity price environment in recent years. However,
as prices weaken the lack of dividend flexibility limits the range of measures
available to reduce cash outflows to cutting operating costs and capex, as well
as asset disposals.
The largest potential cuts would be to capex, although in the short-term this is
typically limited by the need to finish projects that are part way through
completion. Capex spending for both Rio and BHPB will fall in 2013 compared with
2012. However, the largest cuts will be in 2014 and beyond, when the start of
new projects can be deferred.
The companies are therefore focusing on cuts to operating costs and asset sales.
Rio has plans to cut operating costs by USD5bn over the next two years. Both Rio
and BHPB reportedly have a long list of assets available for sale (although
asset sales in a weakening operating environment are not ideal).
While their dividend policy reduces flexibility, we believe that BHPB and Rio's
moderate debt levels and efforts to reduce outgoings mean they are still well
positioned for the current environment. Our base rating cases for the next two
to three years still show that both Rio ('A-') and BHPB ('A+') will have
positive free cash flow after dividends and capex. This is reflected in the
Stable Outlook on both ratings.
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Fitch Ratings Limited
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+44 20 3530 1387
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
The above article originally appeared as a post on the Fitch Wire credit market
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