VALE Vale SA

By Rogerio Jelmayer and Paul Kiernan 

SÃO PAULO--Brazilian mining giant Vale SA is proposing to scrap dividends this year for the first time since it was privatized in the late 1990s, the latest symptom of a deep and prolonged slump in commodity prices felt from South America to Australia.

Management at Vale, the world's top producer of iron ore and nickel, announced the zero-dividend proposal late Thursday as part of the company's latest effort to shore up cash amid the downturn. It must still be approved by Vale's board of directors, and, ultimately, by its shareholders at the company's annual meeting in April.

"As the year progresses and we have more clarity on the market scenario, the board of directors may decide on the distribution of some remuneration to shareholders, provided that there is sufficient cash flow generation," the company said.

Also on Friday, Ratings firm Standard & Poor's downgraded Vale to one level above junk--a BBB- rating--saying low commodities prices will continue to pressure the company's balance sheet and make asset sales difficult. The mining company offered no immediate comment on the move.

Vale's move to eliminate its dividend comes as slackening demand for commodities, notably from China, has undermined prices for a wide range of raw materials from iron ore, copper, and nickel to oil, natural gas, and coal. The tough trading environment has squeezed mining and oil-industry profit margins, prompting drastic cutbacks in spending as well the suspension or reduction of cash payments to investors.

Anglo American PLC has suspended its dividend while other mining groups reduced their payouts last year, such as Phoenix-basedFreeport-McMoRan Inc., Glencore PLC, Cliffs Natural ResourcesInc., Peabody Energy Corp., and Vale itself.

The Brazilian group had previously cut dividends from an all-time high of $9 billion in 2011 to $1.5 billion last year. But executives had said as recently as December that Vale might pay "a small dividend" this year.

Since then, however, the company's situation has appeared to deteriorate. Facing criminal charges and a $5 billion civil lawsuit in relation to a catastrophic dam break at its Samarco joint-venture in November, Vale's stocks and bonds have suffered heavy losses. Its publicly traded notes due 2022 have fallen to as low as 67 cents on the dollar in recent weeks, while its shares have fallen 32% since the end of 2015.

"I think it's the right decision for the time being," said Leila Almeida, head analyst at Rio-based investment consultancy Lopes Filho & Associados. "No company can give itself the luxury of paying dividends to shareholders if that means bleeding cash."

Speculation about big mining companies' dividend plans has been a hot topic in financial markets. But of the top three iron-ore producers, Vale is the first to do away with shareholder remuneration altogether.

Suspending dividends frees up mining companies to spend available cash paying down debt, closing unprofitable operations and investing to make existing facilities more efficient. Mining companies increasingly will need any available cash in the coming years to make payments on debt picked up during the boom years, analysts say.

Vale's decision to scrap dividends comes as the company is investing heavily to finish a sprawling $16 billion mining complex in the Brazilian Amazon known as S11D. The operation will increase the company's iron-ore output by more than 25% and sharply reduce its costs, though many have questioned the wisdom of ramping up production amid a glut in the market.

Write to Rogerio Jelmayer at rogerio.jelmayer@wsj.com and Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

January 29, 2016 12:54 ET (17:54 GMT)

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