It doesn't grow on trees

Miners' dividends are a fragile commodity

Minerals are a wasting asset - they dwindle as time goes on. Miners' dividends, though, keep expanding. BHP Billiton just increased its payout to investors by two per cent even as it announced that earnings in the year to June had halved. Increasing contortions will be needed to keep delivering generous cash returns to shareholders.

BHP and its rivals are making less go further as the market for their mined goods collapses. The Anglo-Australian miner saw its realised price on oil and iron, which together generate close to three-quarters of its operating profit, fall by 39 per cent and 24 per cent respectively during 2015 so far. Pain has been widely shared. At Rio Tinto, falling prices alone wiped 71 per cent off earnings in the first half.

Cost cuts are helping enormously. Efficiencies are likely to drive down BHP's cost of mining each tonne of iron ore to just $15 by next year, or around $25 including freight and royalties. That's comfortably below the short-term market price of $53 per tonne. If BHP manages to increase its annual output to a planned 290 million tonnes without any further investment, on a simple analysis at current prices it would make over $8 billion in cash. That alone would be more than enough to cover dividend costs of less than $7 billion a year.

But for how long? Growth must come from somewhere. BHP shares trade at a dividend yield of around eigh per cent, according to Datastream, twice its highest yield a year ago. Anglo American offers a slightly better return, and Rio Tinto is only a little behind. Meanwhile the broader FTSE 100 index offers an average yield of just four per cent. That suggests investors are sceptical. Fortescue, an Australian iron ore miner, just cut its payout as annual earnings fell by 88 per cent.

BHP has pledged to keep its dividend growing. Like Rio Tinto, it has room to pay shareholders by increasing its debt, or cutting capital expenditure even further. But committing to ever-increasing payouts only makes sense if prices rise with time. By their own admission, miners find the idea of a bounce back to past levels unlikely. Before long, super-normal dividend yields may go the way of all precious resources.