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Posts Tagged ‘regulation’

The options of BHP Billiton

February 2, 2011 Comments off

“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

Vedanta delivers strong results, but faces operational challenges

November 12, 2010 Comments off

“The company reported revenues of US$4.6 billion and an EBITDA of US$1.3 billion in the first
half of this year due to higher volumes and realisations across all operations as compared with
the corresponding prior period. Operating profit was US$985 million and attributable profit
was US$337 million, a 39.4% share of net income.

US$479 million of free cash flow was generated after investing c. $1.1 billion in growth capex.
Net debt and gearing were $1.6 billion and 11.6% respectively. Gearing is expected to be less
than 40% after completion of the Cairn India acquisition, and is expected to reduce quickly
given the inherent cash generation of the group.”

Source: Vedanta Interim Results Presentation, November 11 2010

Performance:

  • Vedanta, the major Indian diversified mining company (although run from London), posted record profits, mainly driven by increases of zinc and iron ore prices. EBITDA margin of around 40% is lower than for some international competitors, but reflects the broad base of small mines the company owns in India.
  • The company is well positioned to be the supplier of choice for the rapidly growing Indian industry. The extension of its business into oil & gas and utilities helps the group to be rather self-sufficient, making it less dependent from poor national infrastructure than international competitors trying to enter the country

Challenges:

  • Upon analysis of the increase of EBITDA the results are not as strong as initially expected. The increase is fully explained by increase of commodity prices (see figure below). Volumes only increased a little bit, completely driven by iron ore volumes. In terms of cash costs, royalties and other comparable items the performance in the 1st half of fiscal year 2011 was actually worse than in the 1st half of fiscal year 2010.
  • The EBITDA breakdown is partly explained by the challenges the company is facing to comply with the rapid changes in regulatory environment in India. The company is struggling to get new assets up to speed as litigation for environmental and ethical/legal issues is forcing it into defensive positions. Apart from the iron ore operations, the low productivity in its mines does not seem to improve.

©2010 | Wilfred Visser | thebusinessofmining.com

ACCC decision on Rio-BHP JV due July 22

June 22, 2010 Comments off

“Australia’s competition watchdog has set a July 22 deadline to review a proposed $US116 billion ($A132.8 billion) iron ore joint venture between BHP Billiton Ltd and Rio Tinto Ltd.

The Australian Competition and Consumer Commission, which began its probe in December, had been due to rule on the joint venture on May 27 but postponed its decision to seek more information from the miners without giving a timeframe for a ruling.

The commission’s website said on Monday that July 22 was now a ‘proposed date’ for an announcement on its findings.”

Source: Business Spectator, June 20 2010

Observations:

  • The Joint Venture is planned to achieve $10 bln in synergies (NPV, thus spread over a long period), a large part of which is achieved by combining transportation infrastructure from the remote Pilbara mines to the iron ore port.
  • Although the Australian watchdog will come with a decision this summer, the European Commission will take much more time to decide on the effects of the JV for the European market.
  • The most likely result from the negotiations of the miners with the government will be an approval of the JV with the condition of a royalty increase.

Implications:

  • Both of the miners are strongly committed to getting the joint venture operational quickly, as they need the additional capacity from the mines in order to retain their market share in the coming years. The proposed increase in resource tax has further increased the necessity of reducing fixed costs in a joint venture agreement.
  • The joint venture between Rio Tinto and BHP Billiton would further increase the risk of implicit pricing arrangements in the iron ore industry. In order to please the regulators, the miners have decided on individually marketing the iron ore. However, organizational ties among the oligopolic producers reduce the transparency of the market. This might be a reason for the European watchdog to impose stricter constraints on the deal.

©2010 – thebusinessofmining.com