The big miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are surging higher today after the iron ore price soared 4% overnight.
But don't take that as a sign we've reached the bottom and are on the upward track. The commodity price still faces the same issues of increasing oversupply and weakening demand.
Still, investors may look at the fully franked dividend yields available from both resources companies – 5% for BHP and 5.1% for Rio, according to Commsec, and simply decide to invest.
Here're 3 reasons why you should give the big miners a miss:-
Dividends will be cut
Both miners' dividends are likely to be cut in future, as profits fall, thanks to falling commodity prices (not just iron ore, but oil, copper, nickel and many others). Despite the companies' so-called progressive dividend policy – which entails higher and higher dividends – sooner or later, both BHP and Rio won't have the funds to pay a higher dividend. When they do cut the dividend, there's going to be a mad rush for the exits, putting even more pressure on the share prices.
Do you want to get caught in that?
Commodity prices are likely to stay low or go lower
As mentioned above, some commentators expect that we have reached the bottom for iron ore prices, but that's unlikely. Our biggest buyer of iron ore – China – is slowing down and demand for iron ore is unlikely to increase dramatically anytime soon. At the same, we have new supply like Gina Rinehart's 55 million tonnes a year Roy Hill mine due to begin production – and that's just one mine under development.
Growth is likely to be hard to come by
While both miners have dramatically slashed costs out of their respective businesses in the past few years, sooner or later they are going to have to start allocating capital to developing new mines or extending existing ones to deliver growth. For Rio, that most likely means more iron ore and copper, which are both already under pressure. BHP, on the other hand, is splitting off its non-core assets into a new company, South32, which may be the wrong decision at the bottom of the commodities cycle. That could see South32 outperform BHP in the short to medium term.
