The drop in commodities prices is putting pressure on global miners exchange traded funds, and the sector could be in for more trouble ahead as tightening balance sheets force some companies to rethink their dividend policies.
PricewaterhouseCoopers warned that miners are “walking a fine line” in their dividend policies as revenue streams dry up in light of falling commodities prices, reports James Wilson for the Financial Times.
The largest miners, especially BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO), aim for stable or rising dividends to attract investors. However, the top 40 miners’ dividend coverage, or earnings per share divided by dividends per share, was just 1.1 times, which was worst than in 2013 when miners had to borrow to pay investors, according to PwC.
“this practice isn’t sustainable in the long term . . . dividends paid in 2014 consumed all available cash, reducing the balance sheet flexibility of miners in the expected continuing lean times,” PwC said in the article.
PwC also argued that with almost half of the top 40 miners experiencing a credit downgraded or placed on a negative outlook last year, the sector will need to prudently managed their finances now more than ever.
If miners resort to cutting back on dividends, global mining and materials-related ETFs could be in trouble. For instance, the iShares MSCI Global Metals & Mining Producers ETF (NYSEArca: PICK) includes a heavy 10.1% position in BHP and 8.1% in RIO. Additionally, the iShares S&P Global Materials (NYSEArca: MXI), which holds a 29.8% tilt toward the metals & mining sector, also has 3.9% in BHP and 3.1% in RIO.