Mining companies have long been criticized for not returning enough cash to shareholders. During the commodity boom before 2008, miners were highly profitable and chose to reinvest their cash in increasingly expensive capital projects rather than returning profits to investors.
However, now the boom is over and these mining giants are coming under pressure to return cash to investors as share prices languish due to low growth and falling profits. Most miners have capitulated and now offer investors quite an impressive yield, but how sustainable are these payouts?
The contenders
| Company | P/E | Dividend yield | EPS | DPS | Payout Ratio |
|---|---|---|---|---|---|
| Cliffs Natural Resources Inc (NYSE:CLF) | 8.9 (forward) | 3.5% | $2.00 (projected) | $0.60 | 30% (projected) |
| BHP Billiton Limited (ADR) (NYSE:BHP) | 17.2 | 3.7% | $3.60 | $2.30 | 63% |
| Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) | 9.6 | 4.2% | $3.10 | $1.30 | 42% |
Cliffs Natural Resources Inc (NYSE:CLF) hit the headlines this year when the company slashed its payout by more than half after increasing it only a few months before. The company cited falling commodity prices and rising costs that it had not been able to predict. The company made a loss during 2012, so I have used predicted figures above.
BHP Billiton Limited (ADR) (NYSE:BHP) is the world’s largest miner by revenue and offers investors a 3.7% dividend yield, covered slightly more than one and a half times by earnings per share. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) supports a 4.2% yield, more than double the market average and easily covered more than two times by earnings per share.
All three payouts outlined above look to be well covered, but how do the individual company cash flows look?
Cliffs Natural Resources
| Metric | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 |
|---|---|---|---|---|
| Net Operating Cash Flow | $96 | $308 | $239 | -$25 |
| Capital Expenditures | -$275 | -$276 | -$333 | -$230 |
| Net Investing Cash Flow | -$268 | -$263 | -$177 | -$228 |
| Cash Available For Financing Activities | -$172 | $45 | $62 | -$253 |
| Cash Dividends Paid – Total | -$89 | -$89 | -$89 | -$23 |
| Issuance/(Reduction) of Debt, Net | ($237) | ($100) | $118 | $622 |
| Dividend Cover From Cash Available For Financing Activities | 0.0 | 0.5 | 0.7 | 0.0 |
| Free Cash Flow | -$269 | -$57 | -$184 | -$279 |
*Figures in millions of dollars. Financing activities include dividend payouts, changes in capital stock and the movement of debt.
As mentioned, after raising its payout to $0.63 per share at the beginning of 2012 from $0.28 per share in 2011, Cliffs Natural Resources Inc (NYSE:CLF) shocked investors when it slashed its payout to $0.15 a share in the first quarter of 2013. The company cited movements in commodity prices that it had not predicted as the reason for the cut. However, as I have shown in the table above, even the new lower dividend payout is too much for the company to be able to afford.
Cliffs Natural Resources Inc (NYSE:CLF) lost $25 million during Q1 2013 and as a result, it had no cash to fund either its dividend or CAPEX spending. In the two previous quarters, when the company paid out its higher dividend at a rate of $0.63 per share, it had some dividend cover, indicating that management raised the dividend too soon and should have conserved cash. On that basis, I believe the dividend is unsafe based on management’s poor decision making.
Verdict: unsafe
