Editorial: ‘Tis the season for dividend cuts

As we all know, mining is a cyclical business, and by all appearances we are into the stage of the commodities cycle where many of the biggest, highest-quality major mining companies, especially base metal miners, are trimming and even suspending their dividends, as one more way to respond to the fourth long year of low commodity prices.

With Anglo American’s dividend yield hitting an out-of-whack 14% in early December, it was time for the iconic mining giant to suspend its dividend payments for the second half of 2015, and all of 2016.

In doing so, it commented that when the payments resume, its dividend policy will “reflect a payout ratio to provide flexibility through the cycle and clarity for shareholders.”

In other words, everyone should expect a low yield whenever the dividend is reinstated.

Anglo’s last dividend payment was its interim-2015 one, with US32¢ paid out on Sept. 17.

Anglo’s dividend suspension will save it £1 billion per year, as it embarks on what it calls a “radical restructuring” over the next two years that will see its portfolio shrink 60%, as it closes, suspends and sells underperforming assets, and reduces its workforce to 50,000 people from 135,000.

Whether by coincidence or inspiration, Freeport-McMoRan followed Anglo American’s lead the next day by suspending its annual common stock dividend of US20¢ per share, after having had a dividend yield nearing 7% for years.

Freeport says the move will save US$240 million per year, and “enhance Freeport-McMoRan’s liquidity during this period of weak market conditions.”

It added that its board will “review its financial policy on an ongoing basis and authorize cash returns to shareholders, as market conditions improve.”

As one of the most generous companies in this area, Freeport had paid out US$4.7 billion in dividends between 2012 and 2014.

Similar to Anglo, Freeport’s dividend suspension is only one piece of a larger plan to restrain capital spending, with expenses in its oil and gas division in 2016 and 2017 only US$1.8 billion and US$1.2 billion, from an already-reduced previous plan of US$2 billion each year.

But that’s not all: Freeport is accelerating plans to reduce its copper and molybdenum production next year, now by 350 million lb. copper and 34 million lb. moly — compared to the previously announced 250 million lb. and 20 million lb. — owing to the “full shut down” of the Sierrita copper mine in Arizona, and what it calls “adjustments” at its primary molybdenum mines.

While Freeport says it “views the medium- and longer-term outlook positively,” it cautions that “as we approach 2016, we are positioning the company for free cash-flow generation in a weak commodity price environment, and remain focused on actions to reduce debt.”

Freeport has had extra visibility in the market since August, when high-profile activist investor Carl Icahn bought an 8% interest, making himself the company’s largest shareholder.

Regarding the dividend cut, Icahn told CNBC’s Fast Money: Halftime Report that “I absolutely agree … you have to conserve capital at these companies.”

In cutting their dividends, Anglo and Freeport join a base metals and coal-heavy group that includes Glencore, Cliffs Natural Resources, Peabody Energy, Vale and Teck Resources. Kinder Morgan, the largest pipeline company in North America, has also just chopped its dividend by 75%.

The two mining giants that have not yet cut their dividend payments are Rio Tinto (with a 7.81% dividend yield at press time) and BHP Billiton (with a 11.97% yield), partly due to Australian tax breaks.

But the shares of both companies have fallen in the range of 10% in the wake of Anglo American and Freeport’s dividend decisions, which means the market is losing confidence that either company can continue to swim against the tide sweeping the mining industry and keep their current dividend policies.


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