CLF Cleveland Cliffs Inc

By John W. Miller And Juliet Samuel 

The mining dividend party is over.

For more than a decade, as the China-led commodity boom drove profits at miners around the world, seemingly never-ending generous dividends helped to attract investors. Between 2012 and 2014, for example, Phoenix-based Freeport-McMoRan Inc., the U.S.'s biggest miner, paid out $4.7 billion in dividends, according to securities filings.

But Anglo-American PLC's announcement Tuesday that it would slash its dividend as part of a downsizing reaffirmed a new investment reality during what is proving to be a deep and lasting downturn for commodities' producers. With Chinese demand slowing and profits sliding, companies are putting their own survival before the short-term interests of their shareholders.

Already this year, Freeport McMoRan Inc., Glencore PLC, Cliffs Natural Resources Inc., First Quantum Minerals Ltd., Peabody Energy Corp., Teck Resources Ltd. and Vale SA have cut dividends, citing lower commodity prices.

Many investors are getting spooked. Matthew Tillett, a London-based fund manager at Allianz Global Investors, said the share prices of many miners have fallen in part because investors no longer expect a steady dividend. "People don't believe these dividends," he said. "If I'm buying these companies, I'm not buying them for the dividend. I'm buying them because I think they're undervalued."

To be sure, there are exceptions. BHP Billiton, Ltd. and Rio Tinto Group have kept their dividends, partly because of an Australian tax break, analysts said.

Some investors also say gutting dividends to pay off debt is common sense. "I think companies would be wise to cut dividends," Evy Hambro told delegates at the Mines and Money conference in London last week. "In general, the absence of cash flow will put pressure on dividends," said Mr. Hambro, who runs BlackRock Inc.'s $3.5 billion World Mining Fund.

Investors also said the dividend cuts and other facets of the mining slowdown are forcing stock buyers to be more selective. "You now have to pick more carefully as you wait out the cycle," said Olivier Tielens, a Brussels-based private mining investor and consultant.

Mr. Tillett, the Allianz fund manager, said he is considering buying shares in Antofagasta PLC, a Chilean copper producer with mines, and First Quantum Minerals Ltd., a Canadian copper producer, because the price of copper is more likely to rise than other commodities like iron ore.

The run-up in commodity prices spurred mining companies to adopt and increase dividends to attract investors who placed a priority on steady payouts, fund managers said.

In 2011, gold miners Newmont Mining Corp. and Eldorado Gold Corp. announced dividends that would increase as the gold price rose. That approach was aimed at making their shares more appealing to investors who, during good times, increasingly favored exchange-traded funds tied to the performance of the metal price. Such funds allow investors to benefit from a rising metal price without taking on the operational and geopolitical risk that comes with a miner's stock.

But the flurry of dividend cuts exposes the risks investors face betting on producers paying out a steady income stream when cash flow is subject to sharp moves in commodity prices. "A lot of times (the strategy) didn't seem to fit, and I think you are seeing that come home to roost," said Greg Eckel, a portfolio manager at Morgan Meighen & Associates in Toronto.

One of the most generous payers has been Freeport, which is the biggest U.S. mining company by market value. But after paying out $4.7 billion between 2012 and 2014, it will distribute a fraction of that this year. In March, Freeport said it would pay a cash dividend of $0.05 per share, down from a previous rate of $0.3125 per share "in response to the impact of lower commodity prices." Freeport said its board "reviews its financial policy on an ongoing basis and has a long-standing practice of distributing cash to shareholders."

Anglo followed suit on Tuesday, saying it would cut 85,000 jobs, radically downsize and suspend its dividend payments for the second half of 2015. The dividend cut, which is expected to save $1.7 billion through 2016, was reported last week by The Wall Street Journal.

"No ones likes to suspend a dividend," said CEO Mark Cutifani. "We think it's the right thing to do to make sure the company remains in good shape."

Anglo's biggest investor said it understood.

"Dividend is only payable when the business is generating free cash," said Fidelis Madavo, an executive at South Africa's state-owned Public Investment Corporation Ltd., Anglo's largest shareholder. When a business is in trouble, "I would not expect management to pay dividend with one hand and ask for money with the other hand," he added. "We are a pension fund, we like dividends [but] we don't like dividends at any cost."

Alex MacDonald, Scott Patterson and Ben Dummett contributed to this article.

Write to John W. Miller at john.miller@wsj.com and Juliet Samuel at juliet.samuel@wsj.com

(END) Dow Jones Newswires

December 08, 2015 16:13 ET (21:13 GMT)

Cleveland Cliffs (NYSE:CLF)
Historical Stock Chart
From Mar 2024 to Apr 2024

Cleveland Cliffs (NYSE:CLF)
Historical Stock Chart
From Apr 2023 to Apr 2024