Brazilian miner Vale has cut its dividend entirely after the Samarco tragedy

Investors fretting over the future of BHP Billiton's dividend have been given fresh reminder of the challenges facing big miners, with BHP's joint venture partner Vale indicating its dividend will be cut to zero this year.

Vale, which shares the failed Samarco iron ore business with BHP, confirmed on Friday that its top executives have recommended the board of directors cut the dividend entirely.

Mining dividends look set to be cut back.
Mining dividends look set to be cut back. Photo: Bloomberg

The Vale executives have also recommended the company change its dividend policy, which requires at least 25 per cent of net income to be to returned to shareholders in dividends.

While Vale, which is on the cusp of being downgraded to a "junk" credit rating, is less financially robust that BHP, the Brazilian miner is a more comparable company to BHP this year given both face billions of dollars in possible charges emanating from November's tragic dam spill at Samarco.

The BHP board is widely expected to announce a reduction to its dividend over the next month.

BHP spent $US6.49 billion on the dividend in the 2015 financial year, and would theoretically have to at least match that amount if it retains the "progressive" dividend policy, which ensures dividends never reduce.

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The analysts at Citi believe BHP would have to increase its debt by close to $US4 billion in the 2016 financial year if the dividend was not reduced and capital spending stayed at the $US8 billion originally guided.

BHP has already confirmed that capital spending will be cut, but the fate of the dividend has not been clarified.

Some BHP investors want more than just one dividend cut, and would instead like to see the "progressive" policy permanently replaced with a system that matches shareholder returns with company earnings in each particular year.

If BHP does walk away from the progressive policy, which was enacted around the time BHP and Billiton merged in 2001, the company will also be reneging on a promise made less than a year ago, when it vowed not to scale-down the dividend to take account of the assets lost to South32 in the demerging of that company.

A BHP spokeswoman reiterated on Friday that no final decision on the dividend had been taken.

"A strong balance sheet is a fundamental enabler of our strategy, it must always come first," she said.

"The Board will review the financial results and consider the outlook before deciding on the dividend, as it does every reporting period."

Citi believes the half year dividend to be announced next month will be less than half the $US0.62 per share announced in February 2015.

Most miners have proportional dividend policies given the cyclical nature of the industry, and such a policy was bestowed on BHP's spin-out South32 last year.

Vale's changes are only a proposal at this stage, and await board approval.

But the Brazilian miner has been reducing its dividend obligation steadily over recent years: the $US500 million dividend it paid in September was just 50 per cent of the dividend it paid in January 2015.

The $US1.5 billion paid in 2015 was less than the $US4.2 billion Vale paid to shareholders in 2014, and well below the $US9 billion paid during the peak of the mining boom in 2011.

That 2011 dividend was accompanied by a $US3 billion share buyback.

London listed miners Glencore and Anglo American have already suspended their dividends, while struggling US coal miner Peabody ceased quarterly payments in July 2015.

Rio Tinto, which has weathered the commodities crash better than most of its rivals so far, has indicated it will continue paying its progressive dividend for the forseeable future.

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