BBL BHP Group Plc

By Andrew Peaple 

When shareholders in BHP Billiton Ltd. gather in Perth, Western Australia, for its annual general meeting this week, a faraway iron-ore mine in rural Brazil will be on their minds.

The breaches at two tailings dams near BHP's jointly owned Samarco operation in the Minas Gerais state on Nov. 5 unleashed a flood of mud across the surrounding area, leaving nine people confirmed dead and 19 missing. The clean-up bill could reach at least $1 billion, according to Deutsche Bank estimates.

BHP's Australian-listed shares have fallen to their lowest level since the financial crisis and close to 10-year lows in the dam bursts' aftermath, as investors fret about the cost to the business--both reputational and financial--and whether the world's largest miner by market value can continue to pay its current dividend. BHP's London-listed shares have also suffered.

Against such a backdrop, Thursday's shareholder meeting is likely to be one of the trickiest in years for BHP's long-time chairman, Jac Nasser, and its chief executive, Andrew Mackenzie.

"I hope they cut the dividend," said one Australian-based fund manager, who holds shares in BHP and expects it to be a key topic at the meeting next week. "The [dividend] policy is creating havoc with the management of the company."

For Mr. Mackenzie, holding to BHP's dividend is a reputational issue. The company's policy is to maintain or lift investor payouts every half-year, even in the face of the downturn in world commodity markets in the last few years. For cash-hungry investors like big pension funds, that sort of commitment is one of the key attractions of resources stocks like BHP.

The miner's boss has strengthened his rhetoric to soothe such investors, even though earnings for its June-ended fiscal year slumped nearly 90%. "Over my dead body sounds a little strong, but it is almost right," Mr. Mackenzie said in discussing the annual results in August, referring to the possibility of a dividend cut.

Analysts are less sure he can hold the line. BHP aims to generate enough cash flow each year not only to cover its costs, but also to fund new investment and its shareholder payout, without going too much further into debt.

Meeting those different objectives is becoming harder. Even before the Samarco disaster, Standard & Poor's Ratings Services cautioned that the miner's payout pledge could weaken its financial position given a broader downturn in commodity prices. The price of iron ore, which contributed 80% of BHP's earnings last year, has fallen below $50 a ton this year, down by a third from a year ago.

In response to a request for comment, BHP pointed to a recent speech by Mr. Nasser in which he said the company's balance-sheet strength had provided it with the confidence to increase its dividend this year.

BHP's dividend already looks out of line with its long-term performance. The company on average paid out around 20% of its earnings before interest, tax, depreciation and amortization in the years from 1970 to 2012, Goldman Sachs has calculated. BHP would have to halve its current payout to achieve that sort of "sustainable" level now, the bank reckons.

It remains unclear how much harder the catastrophic dam bursts will make Mr. Mackenzie's task. While offering some support on the ground, BHP has been careful to state that responsibility for the accident lies with Samarco, a limited liability company it owns in equal parts with Vale SA, the Brazilian mining giant.

But some local lawyers have suggested the co-owners will be targeted if their joint venture can't cover the legal and clean-up costs. BHP should make a provision of around $400 million to cover potential charges over the next two years, Credit Suisse analysts say.

To date, BHP has provided no explanation of what caused the Samarco disaster, amid growing criticism of the company in Brazil. The company's investors will be looking for a clearer accounting come Thursday.

Rhiannon Hoyle contributed to this article.

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November 14, 2015 05:44 ET (10:44 GMT)

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