OREANDA-NEWS.  Glencore's decision not to pay a dividend until at least the end of 2016 highlights the benefits of a flexible dividend policy when managing free cash flow in the cyclical mining sector, Fitch Ratings says. The announcement reinforces our view that Rio Tinto and BHP Billiton's commitment to always increasing, or at least maintaining dividends is an increasingly negative factor in their credit profiles compared to peers such as Anglo American (BBB/Neg), who have in the past shown more flexibility. The limited flexibility is already reflected in the Negative Outlooks on BHP's (A+) and Rio Tinto's (A-) ratings.

Glencore's dividend suspension will contribute nearly a quarter towards a USD10.2bn package of measures that will be used to reduce net debt. But this option would not be open to Rio or BHP unless they dropped their progressive dividend policy, which would be difficult because of its popularity with shareholders and because of the emphasis that both companies have put on the policy.

This restriction has been manageable over the past few years, despite tumbling iron ore prices, because both companies have been able to cut their operating costs and capital expenditure, often by more than their own targets. However, operating cost reductions have been helped by the fall in diesel prices. Further cost reductions are therefore going to be much harder to achieve, especially if we start to see even modest increases in the oil price. Similarly, the big reductions in capex that have been possible as the miners complete the big expansions in their Western Australian iron ore operations will not be repeated.

Non-core asset sales have been used to support free cash flow. The participation of financial investors and trade buyers has arguably created a more active market than most analysts expected. But the acquisition multiples paid have often been at the low-end of expectations, limiting the benefit of the sales, and the supply of assets for sales is not unlimited, so the pace of sales will also probably decline in the future.