If sky-high yields are a sign of deep lying problems, then many FTSE 100 mining stocks are in double-digit trouble. The income looks terrific, but don’t let that fool you.
American Nightmare
One look at the yield shows that diversified mining operation Anglo American (LSE: AAL) is in big trouble. It currently offers an insane 14%, the highest on the FTSE 100. Although the dividend is apparently covered twice, it can’t last for long at that inflated rate.
Anglo American’s troubles only intensify with each passing day. It was a deep hole last week, and since then it has fallen a further 10%, following last week’s decision to close its Drayton coal mine in Australia after the New South Wales authorities recommended the government block its expansion.
Falling Chinese demand is at the root of the commodity sector’s problems, and fears on this front are only intensifying, as Tuesday’s figures showing Chinese, US and UK manufacturing PMIs all falling. Forecast iron ore and copper forecast prices for 2016 suggest little respite for Anglo-American, which has also been hit by platinum losses. The dividend survived July, despite a 36% drop in half-year underlying EBIT to $1.9 billion, but it may fall at the next dividend review, which is scheduled for February. Even at a lowly 3.5 times earnings, I hesitate to recommend this stock.
BLT Past Sell-By Date
Diversification hasn’t helped global mining giant BHP Billiton (LSE: BLT), either. It is down 7% over the past week and 39% over six months. A bad year turned into disaster after the fatal dam burst at its Samarco Mineração SA joint venture with Brazilian miner Vale SA. The mine’s operating licence has now been suspended and BLT and Vale are on the hook for clean-up costs, including a £3.4bn fund for environmental recovery and compensation.
BHP Billiton is yielding double digits at 10.19%. Dare you try to lock into that? Management actually increased the dividend in the summer by 2.5%, despite a sharp fall in profits. Cutting costs and capex self-management have supported the annual $4bn payout so far, but it must surely come under pressure if metal prices fall further.
Now And GLEN
I have saved the worst for last. Glencore (LSE: GLEN). Its share price is down 66% in the last six months, although the falls have flattened out after it signed a deal to buy Libyan oil exports to help offset declining profits from mining. Libya? Management must live for danger.
Glencore is currently listed as the second highest yielder on the FTSE 100 after Anglo American at 12.25%, but don’t be fooled. It suspended its payment in September to help it tackle the more urgent issue of its $30bn debt pile. The decision was made barely three weeks after management said it could continue to pay a dividend, which should alert anybody considering investing in stocks with sky-high yields. They can be cut at any time. Buyers of Anglo American and BHP Billiton beware.
