Will the miners delay higher shareholder returns?

Recent weaknesses in key commodities could impact when miners return funds to shareholders.

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Investors waiting for higher returns from mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) may be forced to wait a little while longer.

After years of below-par returns, shareholders have remained patient with the miners which promised that greater returns were on the way. BHP, for instance, has said that it will boost returns (likely in the form of a share buyback program) once its net debt level falls below US$25 billion. It was anticipated the miner could achieve this target as soon as August thanks to cost cutting initiatives and the sale of non-core assets. Rio Tinto could also undertake a buyback of shares or initiate a special once-off dividend, although that was not expected to happen as soon as BHP’s.

As is the case with BHP however, the timing of the returns largely rests on each miners’ ability to repay debts. BHP’s debt is currently sitting at US$27 billion, while Rio Tinto’s is around US$18 billion. Strong commodity prices leading into 2014 boosted confidence that these levels could be cut significantly sooner, rather than later, but the recent fall in the value of commodities has dampened that view.

Iron ore, for instance, is now sitting 22% below last year’s averages after plunging more than 8% on Tuesday, while copper has also fallen 9%. Copper and iron ore are two of the cornerstones of BHP’s “four pillar” business strategy which account for a large portion of the group’s overall earnings. Meanwhile, iron ore accounts for more than 90% of Rio’s earnings.

Although both companies have freed up cash from divesting non-core assets as well as from cutting costs and improving productivity considerably, they will both feel the effects of smashed commodity prices which will indeed impact how soon either can return funds to shareholders.

Foolish takeaway

Despite the bullish commentary surrounding the mining sector entering into 2014, it is still facing strong headwinds that are unlikely to subside any time soon.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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