Thomson Reuters






* Iron ore prices at 5-year lows reduces flexibility


* BHP, Rio best-placed to withstand weak prices


* Anglo American, Atlas, Cliffs under pressure - S&P


By Sonali Paul


MELBOURNE, Sept 17 (Reuters) - Sagging iron ore prices raise
the prospect the world's biggest miners will shelve plans to
return excess cash to shareholders in February, despite promises
to investors who had hoped to reap the benefits of two years of
austerity.


Stung by slower growth in China, global miners have reined
in expansion plans and brought in new management to sell assets
and drive their mines harder, raising hopes that BHP Billiton
alone could hand back up to $8 billion to
investors.


In the August reporting season, Glencore kicked off the
expected party with a $1 billion share buyback, world No. 2 iron
ore miner Rio Tinto flagged it would be in a
strong position to return capital in February, and BHP said a
move was "close".


But iron ore prices have collapsed to five-year lows since
then, thanks to the major miners flooding the market with new
supply and high-cost miners in China continuing to produce,
defying expectations the market would bottom around $90 a tonne.


If prices remain below $90 for the rest of the year, BHP and
Rio, both looking to keep their single 'A' credit ratings, would
be hard-pressed to return capital to shareholders, beyond
raising their dividends, debt and equity analysts said.


"At the moment, there's a lot of cash flow at risk relative
to history because of commodity price volatility, not just in
iron ore, any spot price exposure. You can't pre-emptively give
back cash in this environment," said Paul Phillips, a partner at
fund manager Perennial Growth Management.


BHP and Rio would be focused on maintaining conservative
balance sheets, he said, with both companies slashing costs,
cutting project spending and paring debt to help weather the
downturn in the price of iron ore and other commodities.


Iron ore has fallen nearly $50 a tonne so far this year.
Every $1 drop in price would wipe $135 million off BHP's bottom
line for the year to June 2015.


"We're not pressuring them for capital returns per se. It's
got to be sensible given the environment we're in," said Ross
Barker, managing director of Australian Foundation Investment
Co, one of the top five investors in BHP's Australian shares.


BHP CEO Andrew Mackenzie conceded after releasing annual
results in August that the board had decided not to endorse a
share buyback as it was being cautious in the face of volatile
commodity markets.


"Looking forward with our current configuration today, our
desire to remain a solid 'A' credit rating business and our view
of future markets, we think it would be premature to start right
now, but we are getting close," he told reporters in London.


But with iron ore prices having fallen 8 percent since then
to hover near five-year lows, BHP and Rio may be even less
likely to start handing back excess cash in February, Standard &
Poor's analyst May Zhong said.


"The lower iron ore prices will reduce their flexibility to
do any significant capital return," Zhong said.


She still expects a small recovery in iron ore prices in
2015, but not above $100, and sees BHP and Rio being in the
strongest position to withstand the tough market.





DEBT WORRIES


The prospect of buybacks is a luxury only the major miners
can consider with iron ore in the doldrums.


At the other end of the spectrum, investors and S&P are
concerned about more heavily geared miners like Anglo American
, for whom iron ore is the biggest earner, as well as
Australia's no.5 producer, Atlas Iron Ltd and U.S.
miner Cliffs Natural Resources Inc.


Anglo American is close to completing its long-delayed $8.8
billion Minas Rio mine in Brazil, which is expected to produce
11-14 million tonnes next year. The company declined to comment
on whether it is looking at ways to shore up its balance sheet
in light of the weak iron ore market.


In Australia, investors are most worried about Australia's
fifth-largest iron ore producer, Atlas Iron Ltd, the
most heavily shorted stock on the Australian market with close
to 16 percent of its shares sold short.


Rival Arrium Ltd moved to raise $680 million
through a share sale this week, and analysts and investors said
Atlas may consider selling stakes in its mines or holding back
on planned expansions to ease pressure on its balance sheet.


"I dare say they'll come up with some sort of joint venture
solution," said Phillips. "They've got a bit of room to move."


Atlas, which analysts estimate is producing at a loss with
iron ore prices below $86, declined to comment on what impact
the weak iron ore price is having on its balance sheet.


One company still weathering the downturn is world no.4 iron
ore producer Fortescue Metals Group, which is in a much
stronger position than it was two years ago, when iron ore
prices briefly dipped below $90 a tonne.


Once carrying more than $10 billion in debt, Fortescue took
advantage of a spike in iron ore prices to accelerate its debt
repayments and expand its output to 155 million tonnes a year,
slashing its operating costs.


"We're pretty comfortable with where Fortescue sits at the
moment," said Fitch credit rating analyst Vicky Melbourne.