Hello David, With the steep slide in commodities, metals in particular, are mega miners BHP Billiton and Rio still part of your core portfolio or have you sold them? For someone with a long-term horizon and a holder of those shares myself, what is your prognosis?

David Fuller's view

Many thanks for your email of general interest to many subscribers. 

I have held BHP Billiton and Rio Tinto for decades, often buying a little more on weakness.  That strategy mostly worked well and the continuous dividend stream has been very attractive.  However, what we are currently seeing is certainly the most challenging period for these two shares. 

BHP (est p/e 24.11 & yield 11.42%) is the more vulnerable following its recent burst dam disaster in Brazil.  The company has already said that it will protect its balance sheet rather than the dividend, so I expect a significant cut in the yield next year, not least as the cash dividend cover is only 0.5, according to Bloomberg.  This probability is already reflected by the price.  

Rio Tinto (est p/e 12.81 & yield 7.39%) has suffered but not nearly so much as BHP.  Rio currently has a cash dividend cover of 1.6, so I think the dividend is safe throughout next year, although the share is likely to remain weak until a good recovery in metal prices is underway. 

With hindsight, if I was going to sell, I should have done it over a year ago.  I expect both companies to survive and eventually emerge stronger within the mining sector, although that could take another year or two.  At least we are paid for our patience, even though I expect BHP to reduce its dividend by at least 50%, subject to the dam disaster costs.