Suddenly there seems to be sunshine over the Australian mining industry. So forget the gloomy June 30 reports, especially from the services sector from companies such as WorleyParsons.
According to ratings group, Standard & Poor’s the outlook for Rio Tinto, Fortescue Metals Group and Brazilian miner Vale are on the up – but not so BHP Billiton, which has to contend with the impact of the Samarco disaster and its costs (so why then is S&P smiling on the other Samarco shareholder in Vale?).
So upbeat is S&P that it reckons these big miners – but not BHP – that it believes the larger miners will be able to increase dividends within two or three years. Rallying commodity prices over the past six months have convinced the ratings agency that higher dividends could be on the agenda within several years.
In a review of the big miners after the recent reporting season, S&P praised efforts across the sector to reduce costs and pay down debt.
"According to our calculations, the big companies are likely to reach their leverage targets by the end of 2017 or 2018, after which they are likely to distribute more dividends to shareholders, though we anticipate that they will retain more payout flexibility than they had in the past," the ratings agency said in a note.
The new views come seven months after S&P threatened to downgrade BHP if it maintained its progressive dividend policy. The policy was axed three weeks later in February.
BHP has the strongest credit rating of the biggest miners, but S&P downgraded the company to an A rating in February, and put the miner on a "negative" outlook despite the decision to reduce dividend payments.
Most commodity prices have improved (copper though remains very weak, while nickel, coal, zinc and iron ore have all risen nicely) since then and S&P has raised its expectations for several commodities, but unlike Rio, Vale and Fortescue, the ratings group chose to keep BHP’s outlook on “negative” status.
That’s because of what S&P sees as the continuing uncertainty around penalties relating to the Samarco dam disaster in Brazil here the final bill for BHP and Vale is still very uncertain and subject to political interference as well as local court decisions
As well, S&P remains sceptical about the ability of BHP’s petroleum division to contribute significant growth to the earnings base over the next 18 months given plans for its production to fall and S&P’s gloomy view that oil prices will average $US45 per barrel in 2017.
But the ratings agency said BHP was on the improve.
"We see now lower chances of a downgrade than in February 2016," said S&P in a note.
S&P said expects BHP and its partner in Samarco, Vale, will each pay half of the cost for remediations and reparations, which has been estimated 9.9 billion Brazilian Reals.
But S&P’s smiley face so far as BHP is concerned didn’t help the miner’s hare price yesterday – it dipped under $20 yesterday after peaking well above $21 earlier in the week ($21.42 on August 24). The shares ended at $19.84 yesterday, down 2.8%.
Rio shares fell 1.2% to $46.99 and Fortescue shares were steady on $4.90 after hitting their most recent peak of $5.08 on Tuesday of this week. Rio’s most recent high was just over $52 a share last May.
