Australia's mining giants are expected to review their shareholder payouts as weak iron ore prices continue to put the industry under immense financial pressure.
Plunging prices and no sight of a recovery has prompted ratings agency Standard & Poor's to place eight of the world's largest iron ore producers on CreditWatch negative.
BHP and Rio Tinto are likely to have their credit ratings cut within the next few weeks, a negative reflection on a company's ability to pay back debt, therefore hurting the terms it can borrow at.
Other companies on the list included Fortescue Metals and Brazil's Vale, with S&P saying it expected the severe supply and demand imbalance in the iron ore market to continue for the next two years.
Compared to other miners, BHP has the strongest financial flexibility to mitigate falling prices, with its diversified portfolio and ability to cut capital expenditure, S&P's director of corporate Ratings May Zhong said.
"That said, their commitment to the progressive dividend policy could reduce their financial flexibility," she told reporters.
Both BHP and Rio have promised not to cut their dividends, meaning they could have to increase debt or forego growth to keep shareholders happy.
Ms Zhong said several scenarios could cause BHP to underperform, including adopting a shareholder friendly initiative or undertaking a sizeable debt-funded acquisition.
CMC chief Market strategist Michael McCarthy said BHP would respond once its South32 spinoff is finalised in May.
"They're a reasonably well diversified commodity company and although they've seen pressure in two major areas they're also doing okay out of their other operations so it's possibly not as gloomy a scenario as being painted by the credit ratings agencies," he said.
Revisiting the company's dividend policy was a real risk, but he said investors should not buy resource stocks as a yield play.
S&P plans to resolve the CreditWatch placements over the next two to three weeks.
The agency, which has also placed Western Australia's AA+ credit rating on CreditWatch, says the eight companies could expect one or even two notch downgrades of their financial and business risk profiles, or they might not get a rating cut at all.
Iron ore prices increased on Monday to $US48.80 a tonne, up 3.2 per cent but are still hovering around decade lows.
The ratings agency predicts prices will fall to US$45 in 2015, while Deutsche Bank says it will slide to $US40 and Citi forecasts a drop to $US37.
Meanwhile, Citi analysts say junior miner BC Iron should prepare to stop production in Western Australia to help save cash if iron ore prices tumble further.
Atlas Iron, which has decided to suspend its production, said it continues to review its capital structure and confirmed the company is speaking with secured creditors.
Share
