BHP Billiton Ltd. (BHP) and Rio Tinto Group. (RIO), the world’s two biggest mining companies, may need to rein in the size of widely anticipated share buybacks if this year’s 30 percent slump in iron ore deepens in the second half.

“The most pertinent question is whether Rio will be bold enough to proceed with a much-mooted share buyback in early 2015 if iron ore ends 2014 on a weak note,” Macquarie analyst Jeff Largey wrote in a June 24 report. The bank estimates BHP could buy back 5 percent of its market value and Rio 10 percent, about $19 billion of shares at yesterday’s prices.

Waning Chinese demand coupled with an expanding worldwide glut of the steel-making material saw iron ore decline to $89 a metric ton on June 16, the lowest since September 2012. Analysts widely expect London-based Rio to bolster its cash return beyond its dividend when reporting earnings in February. BHP Billiton, the world’s biggest mining company, has also been forecast to return cash to investors as early as August.

“We question whether Rio may look to limit the scope of a potential buyback,” Largey said. “A weaker-than-expected iron ore price and a share buyback may limit future funding flexibility.”

Rio Chief Executive Officer Sam Walsh said in a December interview that the company’s drive to strip out more than $2.3 billion of costs since the start of 2013 would provide the board with options to return cash to investors. The board will decide on the size of any possible return prior to its full-year earnings announcement in February, he said.

$100 Average

Rio Tinto’s London-based spokesman Illtud Harri and BHP spokesman Ruban Yogarajah both declined to comment.

If the price of iron ore averages below $100 a ton this year, BHP and Rio “may struggle to justify a share buyback program and expect to meet credit metrics,” Largey said. Still, if the price rebounds toward the bank’s estimated second-half average of $108 a ton, a buyback could be justified, he said.

Iron ore with 62 percent content delivered to Tianjin port in China, a benchmark, rose 0.4 percent to $93.70 a dry ton yesterday, according to The Steel Index Ltd.

Rio closed little changed at 3,097.5 pence in London trading yesterday, valuing it at about $99 billion. BHP fell 1.1 percent to 1,900 pence, valuing it at about $177 billion.

Rio has said its focus this year is to cut debt from $18.1 billion at the end of last year.

It may buy back $3 billion to $5 billion of shares next year, Jefferies LLC analyst Chris LaFemina estimated after Rio reported $10.2 billion of underlying 2013 profit in February.

$5 Billion

BHP’s potential returns may fall to $5 billion from $10 billion in the next two years on the iron ore drop, Morgan Stanley said June 11. It could return $2 billion to $3 billion when it announces fiscal 2014 results Aug. 20, the bank said.

BHP reported net debt of $27.1 billion at the end of last year. It has said it’s seeking to reduce debt to $25 billion before considering making potential returns beyond its dividend.

“The cut in iron ore prices has reduced the excess cash we expect BHP Billiton to generate to $2 billion per year” from 2015 to 2019, Morgan Stanley analyst Menno Sanderse wrote in a June 11 report in which he reduced his earnings per share estimate for the company next year by 21 percent.

Australia, the largest iron-ore exporter and home to Rio and BHP operations, yesterday cut its price estimates for this year and next, predicting surging mine output will boost competition among low-cost shippers and force suppliers to close in China.

The material will average about $105 a ton this year, from $110 forecast in March, the Canberra-based Bureau of Resources and Energy Economics said. Prices may average about $97 a ton in 2015, down from the $103 estimated in March, it said.

“Seaborne iron ore supply growth has greatly exceeded global iron ore demand growth so far this year,” Jefferies’ LaFemina wrote in a June 20 note. “This tsunami of supply is still rolling in, and supply growth is likely to be substantial until 2016.”

Bloomberg