Iron ore miner’s dividends ‘still on track’: Macquarie

Ongoing strength in the iron ore price mean the big miners should be able to maintain dividend levels, Macquarie analysts say.

A BHP freight train carries iron ore to port Picture: Bloomberg

Ongoing strength in the iron ore price and low debt levels mean Australia’s biggest miners should be among the few local corporate giants in a position to maintain dividend levels, according to Macquarie analysts.

In a client note, Macquarie said that, despite falling base metals prices weighing on BHP, Rio Tinto and South32, with the iron ore price still hovering around $US79 a tonne, the Pilbara’s heavyweights should still be delivering strong cash flows from their operations, underpinning their dividend yield.

“Given the strong free cashflow yields on our forecasts and at spot prices, we believe the iron ore miners should continue to pay healthy dividends,” the client note said. “The 12-month forward yield is 3 per cent for S32, 7 per cent for BHP, 8 per cent for Rio and 14 per cent for Fortescue. These screen well versus other sectors, with the ASX 100 average forward yield being 5 per cent.”

BHP would also have taken a big hit from the tumbling oil price, Macquarie analysts said, and had the biggest debt position of the big miners — with gearing levels at 20 per cent, compared to net gearing of 5 per cent for Fortescue and 7 per cent for Rio Tinto — but the strength of its Pilbara iron ore portfolio still made the company an attractive proposition.

“Earnings upgrade momentum remains robust for For­tescue, Rio Tinto and BHP driven by buoyant iron ore prices, which offsets weakness in other commodity prices,” Macquarie said.

“The medium-term outlook for S32, at spot prices, has weakened recently, driven by the decline in alumina prices. The majors with iron ore exposure should continue to pay healthy dividends, with yields well above those offered in other sectors and above that of the ASX 100 on ­average.”

But UBS resources analyst Glynn Lawcock said the sector as a whole was likely to take a more cautious approach to dividend payments given the ongoing uncertainty over the fallout from the coronavirus crisis.

“Companies that are investing and therefore have negative free cash flow this year such as OZ Minerals might also take a more conservative approach. If history can act as a guide we expect BHP and Rio to maintain dividends barring a complete shutdown of operations in Australia,” he said in a client note. “BHP paid dividends through the cycles of the GFC in 2008-09 and 2015-16, opting to cut growth capital instead. Rio didn’t pay an interim dividend in 2009 as part of its rights issue to repair the balance sheet, otherwise maintained.”

But base metals miners may have to pull back on shareholder payouts in the face of falling ­prices, and operational risk in the gold sector remained the biggest threat, he said, pointing to the shock decision by Northern Star Resources to withdraw its annual guidance and defer payment of the interim dividend.

“In the gold space, a shutdown of a mine … could lead to a large temporary loss of revenue. While most of our coverage has strong balance sheets, the hedge book may present a risk if gold production is unable to be delivered into these hedges,” he said.

“We have removed the payment of forecast dividends for Northern Star, Western Areas and OZ Minerals for August 2020. We have cut Newcrest’s August 20 estimated dividend to US7.5c per share (half US15c per share annual policy minimum) while Regis dividend is cut to 8c per share, from 15c per share.

“By moving to the bottom of published policy bands, we have also trimmed dividend expectations for BHP, Fortescue, Whitehaven and Coronado. We note this is an early move and that the ultimate dividend decision will be made in August with the benefit of hindsight on 2020 cash flows.”