Ratings agency Standard & Poor’s has warned BHP Billiton and Rio Tinto their credit ratings will be difficult to maintain if they push for capital management in the event that the iron ore price remains weakened.
The ratings agency examined the sector assuming an iron ore price stagnation at $US90 a tonne until the end of next year. Under this scenario BHP, Rio and Brazil’s Vale would be largely insulated, including the capital management plans of the first two.
However, if the price dips below $US90, that buffer will be squashed.
“As such, they will have less flexibility at the current ratings to undertake debt-funded growth or capital-management initiatives,’’ S&P said, according to The Australian.
The diminished returns from iron ore are important to BHP and Rio because the pair have impatient registers pushing for a greater share of the profits from the resources supercycle.
Both companies have come under sustained pressure from institutional shareholders to hand more profits back to shareholders instead of putting more capital into major projects.
Both BHP and Rio, now under new post-global financial crisis chief executives, have made strong overtures to investors about capital management despite the falling iron ore price.
BHP Billiton president of marketing Mike Henry said the recent decline of the global iron ore price was not unexpected for the miner, The Australian Financial Review reports.
The iron ore price has pushed back above $US96 a tonne and hit its highest point in more than a month on the back of upbeat manufacturing data out of China this week.
Benchmark iron ore for immediate delivery to the port of Tianjin in China is trading at $US96.5 a tonne, up from $US94.70 in the previous session.
"We’ve been saying for a long period of time now that growth rates in China will begin to slow, that you would see steel intensity slowing at an even greater rate than GDP declines, and at the same time you’d see a lot more low cost supply coming to market that would bring prices down," Mr Henry said after a tour of the miner’s operations in Port Hedland, the AFR report.
BHP cuts coal jobs
BHP is axing 163 jobs from its Mt Arthur thermal coalmine, the largest in NSW’s Hunter Valley, as part of its productivity and cost cutting changes.
The move follows the decision to cut 500 jobs from its West Australian iron ore business. However, those job losses are more to do with the project transitioning from construction to production.
Originally published as Iron ore price risks BHP rating: agency.
Source: Herald Sun
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