Update BHP Billiton 8217 s multibillion cut

BHP Billiton did indeed cut pay-outs to shareholders, as forecast in our article below.

On an interim basis the cut was 75% to 16 cents, and BHP’s first dividend reduction since 1988.

The miner reported a net loss for the first half of 2016 of $5.67bn—bigger than the market was expecting—and its first in more than 16 years.

Underlying profit collapsed to $412m from $4.89bn a year ago.

The impact from the bigger than forecast loss and deeper than expected implosion of profits risks turning sentiment on the shares dark again, after they rose sharply in London trading on Monday.

This article will be updated early on Tuesday

Investors seem to have concluded there’s a wind of change blowing through the world of commodities and have bid ‘core commodities’ almost 6% higher so far this month.

Resurgent optimism first appeared in gold, which rallied as much as 17% between mid-January and earlier this month.

Even the severely drained oil price has also managed to keep above multi-decade lows since touching these in January.

This reorientation of the ‘commodities complex’—including the erstwhile biggest consumer of industrial metals, China—has seen related assets rally strongly in turn.

On Monday, Europe’s STOXX Basic Resources index closed 7% higher, extending its month-to-date gain to 13%.

The rebound—albeit in all probability short-lived—has been a boon for shares at the epicentre of the complex, even as investors hunkered down ahead of inevitably sobering full-year reports.

For instance, recent bounces have not compensated for total return losses in shares of Standard Chartered and BHP Billiton, which will be the next EM/commodity bellwethers to unveil their damage from 2015.

The global mining No.1 by 2015 revenues—which is also exposed to oil and gas production—is scheduled to release first-half results for 2016 shortly.

We might as well ‘yadda-yadda’ past expectations for headline numbers and get straight to the point.

Investors want to know if it will follow the rest of the commodity world and accept the new realities by cutting dividends.

BHP is widely expected to cut the interim pay-out by half to US$0.31 or about US$1.6bn.

If so, it would undoubtedly also retreat from its own longstanding “progressive dividend” policy—never cutting year-on-year, in other words—as arch rival Rio Tinto did earlier this month.

Like Rio, the choice is a cut of dividend or its credit rating.

One of them has to be reduced.

Cutting the divvy is clearly cheaper than a higher cost of capital, even if BHP’s net debt is ‘just’ a quarter of forecast annual Ebitda.

(Well below Net Debt/EBITDA at fellow gargantuan, Brazil’s Vale SA, at 61%).

BHP has already announced a $7bn writedown on its US assets ahead of a profit slump forecast as much as $1.19bn at the half-year stage.
The next question is: will BHP have done enough to save its A-grade rating?

The main rating agency reviews have structured their warnings in such a way as to suggest that even action as radical as a wholesale dividend suspension and slashing capex by $2bn might not save the rating.

Worst-case aside, here are our main forecasts

• Revenues of c.$16bn, down 46.6% year-on-year
• Underlying EBITDA at US$5.970m, down 60%
• $4.3bn net loss, after impairments
• Operating cash flow after tax at $3.1bn, down 70.5%
• Negative $2.7bn free cash flow after the final FY15 dividend
• Net debt at US$30bn (from US$24.4bn)
• Full-year 2016 dividend cut by 50%-75% or at least US$3bn
• Capex cut by as much as $4bn-$4.5bn.

BHP will also probably avoid just blitzing shareholders with bad news.

It will probably try to address a slide in production, offer measures to revive returns on assets (currently at a 15-year low) and give more information on the Samarco debacle.