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The options of BHP Billiton

February 2, 2011

“BHP’s cash pile – which in June last year stood at $12.5bn (£7.8bn) – may explain investors’ indifferent reaction to the failure of its $39bn hostile bid for PotashCorp last November, as well as two previous failed deals.

BHP’s progressive dividend policy suggests that last year’s $4.6bn dividend payments will be exceeded this year, starting with the interim pay-out. Share buy-backs may compensate investors for BHP’s failure to complete the Potash deal or an iron ore tie-up with Rio Tinto.

The company said on November 15 that it would buy back $4.2bn in shares. That sum, however, is intended to complete an existing $13bn programme announced in 2006. This opens the way for a new buy-back to be announced as soon as the interim results.

‘We expect management may announce a fresh $15bn-$20bn [buy-back] programme when results are announced,’ said Andrew Keen, mining analyst at HSBC. ‘We believe at least $8bn is possible in 2011 just to prevent BHP slipping in to a net cash position and a further $10bn required in 2012.’”

Source: Financial Times, January 31 2011

Observations:

BHP Billiton basically has 4 options to use the cash:

  • Return to shareholders through ‘super’-dividends or share buy-backs;
  • Invest, invest, invest. Expand production as much as possible;
  • Attempt more acquisitions. Large acquisitions are unlikely to succeed, but smaller asset acquisitions might work;
  • Keep the cash; wait and see what happens.

Implications:

  • Major acquisitions in the current field of operations of BHP Billiton will be pretty much impossible because of regulatory issues. The only areas in which acquisitions larger than $5bln might be successful is in precious metals/diamonds/uranium or oil&gas. Many investors won’t be happy with the latter, as it is hard to prove any synergy between operating a mining company and operating an oil&gas company.
  • One of the most important topics for the company where the abundance of cash might be helpful is in establishing a stronger presence in China. The Chinese government is opening up the country for investment to enable access to the more challenging reserves. Partnering with a Chinese firm and actually starting operations in China would create a lot of goodwill for the BHP management with the Chinese rulers.

©2011 | Wilfred Visser | thebusinessofmining.com

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