Rio Tinto(LSE: RIO) andBHP Billiton(LSE: BLT)are currently facing an unprecedented number of problems.
So, in an attempt to main profit margins and shareholders returns, the two mining giants are ramping up production. But can this really safeguard their dividends?
Reassuring update
Rios quarterly production update, released today, showed how the mega-miner is ramping up production to lower costs and maintain growth. During the first three months of this year, Rios iron ore production rose 12% year on year. Copper output fell 9% year on year while aluminium production remained stable. Rios production of coking coal rose 10%.
And alongside the companys production figures, Rios management used todays release to reassure shareholders that the mining giant was working overtime to maximise shareholder returns.
We continue to drive efficiency in all aspects of our business, which is reflected in our solid production performance during the first quarterBy makingbestuse of our high-quality assets, low-cost base and operating and commercial capability our aim is to protect our margins in the face of declining prices and maximise returns for shareholders throughout the cycle.
Uncertainty ahead
However, despite this relativelyupbeat trading statement from Rio, storm clouds are gathering over the company and its larger peer BHP.
Last week, credit ratings agency S&P placed Rio and BHP on credit watch negative ahead of a possible credit rating downgrade. The agency stated that it was concerned about the miners financial stability, as the prices of key commodities continued to plummet.
Further, some City analysts have already started to question the sustainability of BHPs dividend.
In particular, based on current iron ore prices and capital spending plans, its believed that BHPs free cash flow from operations will not be able to cover the companys current dividend payout. As a result, its likely that the company will be forced to issue debt to support its dividend.
Luckily, BHP can afford to borrow a bit more to sustain the payout. The companys net debt currently stands at 1.5 times earnings before interest, tax, depreciation and amortisation, which isnt overly concerning.
On the other hand, analysts are positive about Rios dividend potential. Analysts believe that Rios dividend cover will fall to 1.2 times during 2015, before rising back to 1.5 times during 2016.
The bottom line
So overall, despite falling commodity prices, the dividends of Rio and BHP look fairly safe for the time being.
BHPs strong balance sheet can take on more debt to help fund the companys dividend payout, while Rios rising output and falling costs will help the company maintain its dividend.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.