Archive

Posts Tagged ‘share buy-back’

BHP Billiton’s record profits don’t hide industry concerns

August 26, 2011 Comments off

“Robust demand, industry wide cost pressures and
persistent supply side constraints continued to support the fundamentals for the majority of BHP Billiton’s core commodities. In that context, another strong year of growth in Chinese crude steel production ensured steelmaking material prices were the major contributing factor to the US$17.2 billion price related increase in Underlying EBIT.

However, BHP Billiton has regularly highlighted its belief that costs tend to lag the commodity price cycle as consumable, labour and contractor costs are broadly correlated with the mining industry’s level of activity. In the current environment, tight labour and raw material markets are presenting a challenge for all operators, and BHP Billiton is not immune from that trend. The devaluation of the US dollar and inflation reduced Underlying EBIT by a further US$3.2 billion.”

Source: BHP Billiton news release, August 24 2011

Observations:

  • BHP Billiton, which uses a fiscal year ending June 31st, reported record full year EBIT of $32bln on revenues of $72bln.
  • The 62% year on year increase in EBIT was mainly caused by ‘uncontrollable’ price increases. BHP managed to increase volumes slightly, but this gain was offset by higher costs of over $1.4bln. In a breakdown of the cost increase BHP estimates approx. half of the increase to be structural.

Implications:

  • Analysts point at the weakness of BHP’s buy-back program, in which the company runs the risk of overpaying for its own shares. In general the buyback and dividend program reveals the lack of investment options and the hesitance of management to embark on aggressive expansion in the light of global economic and financial uncertainty. Though industry leaders continue to mention supply shortage as key industry driver, they don’t want to end up at the top of the cost curve.
  • Key developments to watch in the coming months are the continuation of China’s rapid growth; high iron ore, copper & coal prices; and survival of the international financial system. If any of these trends turn around, 2011 might well be the peak of the mining industry’s profits, after which the mantra of ‘cost control’ replaces the current theme of ‘capacity growth’.

©2011 | Wilfred Visser | thebusinessofmining.com

Advertisements

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

Vale plans Hong Kong share listing

September 24, 2010 Comments off

“Vale, the Brazilian mining giant, plans to list shares in Hong Kong as the company seeks closer ties with investors in China, the world’s largest net iron ore importer by volume and its biggest market by far. This is a coup for the city’s stock exchange, which faces fierce competition from Singapore and Shanghai and is trying to attract more non-Chinese businesses.

It has been particularly successful with resource companies, which have become increasingly reliant on China’s heavy demand for natural resources to power their growth. ‘Asia is the main market for our products and is becoming increasingly important,’ Vale said in a statement about the planned listing.”

Source: Financial Times, September 24, 2010

Observations:

  • The Hong Kong stock exchange (HKEx) has performed a role in the listing of Rusal, IRC and smaller mining companies. Other resources companies listed in Hong Kong are Sinopec, China Resources, China Coal, Chalco and PetroChina.
  • Vale has listings in Sao Paolo, New York, Madrid and at Euronext with a total market capitalization of $158bln on an enterprise value of $169bln.

Implications:

  • In the recent special on the “Top 10 Priorities for Vale’s CEO Roger Agnelli” on this site, strengthening the ties with China was identified as one of the top priorities. The share listing in Hong Kong set up not to raise more money for the company, which has a lot of cash already, but merely to improve contact with investors, clients and government in the Far East.
  • The company is currently buying back shares, signalling that M&A moves that would prevent BHP’s acquisition of PotashCorp are unlikely. Future share issuing might well be performed on the Hong Kong exchange as this would provide Chinese investors a change to improve ties with the company.

©2010 | Wilfred Visser | thebusinessofmining.com