Iron Ore Rally Still Not Enough to Save BHP Billiton

Just weeks ago iron ore was playing down at the US$40 per tonne level. Everyone predicted that prices would stay low. Yet a recent surge has proven many analysts wrong. Iron ore rallied 6.2% to break the US$50 mark.  It’s the highest iron ore has been in three months. Chinese production is believed to have been the main cause for the rally. After Lunar New Year break, Chinese steelmakers ramped up production, reducing the supply of iron ore.

It’s probably not the end of low priced commodities. However it could be signs that global demand for iron ore could rapidly increase in the next few months. Iron ore prices have also lifted up two beaten down miners, BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO]. Both have been able to reverse small amounts of aggressive selling by investors.

BHP has managed to climb 17% to around $17 per share in the last four weeks. Rio has managed to do the same by climbed 11% to around $43 per share. Helped by the recent rally, BHP is now only down 3.48% for the year. But BHP’s position could become a lot worse by the end of today.

This morning BHP revealed their long awaited first half results for FY16. Investors were finally able to see if BHP would cut dividends or how extensive the damage caused by the Samacro dam disaster was.

Today BHP revealed that more than halved its dividend and made a net loss of US$5.7 billion. The miner is paying out only 16 cents per share. Shareholders are sure to be disgusted as just six months ago BHP insisted it has the ability to defend their dividend policy.  BHP hasn’t paid dividends lower that 16 cent since February 2005. And it is the first time since 1988 that BHP has cut dividends.

The extra cash was used to post their US$412 million underlying profit figure. Yet profits were still well below expectations of US$727 million. BHP tried to soften the blow of dividend cuts by proposing a new plan.

BHP said it would pay out 50% of underlying profits each year from now on. But how reliable can these claims be? In just six months BHP reversed its attitudes towards dividends. It’s more likely they will do it again, rather than stick to dividend schemes.

Another likely motives for the dividend cut was maintain a somewhat health balance sheet. The rating agency, Standards & Poor had already cut BHP’s credit rating from an A+ to an A. The fear of being cut to an A- was obviously too much for BHP. It seems their ratings are more important than benefiting their shareholders.

So it seems like the iron ore rally has come too late. BHP could be beyond saving for 2016, but they might be building for the next five year. Along with the disappointing news, BHP has decided to make executive changes. Petroleum boss, Tim Cutt, and iron ore boss, Jimmy Wilson, will be leaving the company. Their replacements will be in the form of internal promotions. And it might be a sign of BHP cutting the fat.

No one expected BHP to perform well. Their industry was hit hard in 2015. Declining commodity prices and the Samacro mine disaster was more than enough to send share prices plummeting. The question we want to know is, will it persist?

Iron ore has already shown promising signs of picking up. Copper also traded up last night, closing in on February highs. Analysts could be more positive on the outlook of commodity for 2016. And if they are, BHP might be rising up on the back of appreciating commodity prices.

Härje Ronngard,
Junior Analyst, Money Morning

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