BHP's boss faces US$11B ‘ dilemma’

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SYD­NEY/ LON­DON• The world’s largest miner BHP Bil­li­ton PLC is sit­ting on a US$ 11 bil­lion cash pile and what CEO An­drew Macken­zie does with the money will be a crit­i­cal test of his abil­ity to in­vest dur­ing the in­dus­try’s worst down­turn in decades.

An­nounc­ing plans this week to slash its div­i­dend and shore up its bal­ance sheet, the min­ing gi­ant said re­peat­edly that it would con­sider “op­por­tu­ni­ties” — crank­ing up the rhetoric, even as it warned of pro­longed price pain.

One of a gen­er­a­tion of con­ser­va­tive min­ing bosses brought in af­ter years of break­neck growth, for­mer BP PLC ex­ec­u­tive Macken­zie is not an em­pire builder by na­ture. He has not done a sin­gle ma­jor ac­qui­si­tion since he took the reins at BHP in 2013.

But with in­debted min­ers An­glo Amer­i­can PLC and Freeport-McMoRan Inc. un­der un­prece­dented strain, bankers say some of the world’s most cov­eted cop­per mines could be­come avail­able — test­ing Macken­zie’s deal-mak­ing met­tle.

“It’s not quite a war chest, but who knows what might come un­der dis­tress in this sort of en­vi­ron­ment,” the BHP boss told in­vestors and an­a­lysts, when asked about the US$11 bil­lion.

Only a few deals and only one metal — cop­per — can ex­pect to meet BHP’s tough re­quire­ments f or an ad­e­quate re­turn. Cop­per is the most sought-af­ter in­dus­trial metal, as ex­ist­ing mines age and new ones are found in in­creas­ingly dif­fi­cult lo­ca­tions.

But the buy- or- wait de­bate, say in­vestors, bankers and an­a­lysts, is gath­er­ing steam in­side some of the in­dus­try’s largest play­ers, who are al­ready fac­ing calls from some quar­ters to make the best of a ter­ri­ble mar­ket.

“This is ex­actly what BHP should be do­ing. Us­ing their strength of bal­ance sheet to make bot­tom of cy­cle ac­qui­si­tions and dur­ing boom times pay out most of their earn­ings — rather than buy and or in­vest at top of cy­cle,” said Paul Xi­radis, chief in­vest­ment of­fi­cer of Aus­trali­abased Aus­bil In­vest­ment Man­age­ment, which owns BHP stock.

The world’s min­ing gi­ants were heav­ily crit­i­cized in the years af­ter the 2008 fi­nan­cial cri­sis, ac­cused of mak­ing ru­inous ac­qui­si­tions and — worse — pur­su­ing costly mine projects at the top of the mar­ket, fu­elling over­sup­ply when the mar­ket could least af­ford it.

But as the cy­cle hits bot­tom, steep spend­ing cuts have left BHP, a min­ing be­he­moth, pump­ing in enough cash to stay in busi­ness but, some an­a­lysts ar­gue, not enough to grow.

That puts the ques­tion of whether to wait or to buy firmly on the ta­ble: is the time now, or is it a decade too soon?

“(BHP) have a strate­gic dilemma,” one in­dus­try banker said.

An­glo, Freeport and Glen­core PLC have all put as­sets on the block as part of ef­forts to cut debt. For now, ad­vis­ers say none of those meets BHP or in­deed chief ri­val Rio Tinto PLC’s re­quire­ments — some are not cop­per, oth­ers are too small or in risky ju­ris­dic­tions once seen as pi­o­neer­ing and now frowned upon.

But if An­glo and Freeport fail to find buy­ers for what they have got for sale now, bankers say bet­ter mines could come up.

More likely, ac­cord­ing to in­dus­try ad­vis­ers, the com­pa­nies will be re­luc­tant to sell crown jew­els and would put them­selves in play, along­side cop­per-heavy play­ers like Lundin Min­ing Copr., or First Quan­tum Min­er­als Ltd., al­ready un­der the scan­ner.

All of this could be good news for BHP and even more so for Rio, which has its own US$9 bil­lion of cash and is fac­ing calls to grow in cop­per to di­ver­sify a port­fo­lio dom­i­nated by iron ore.

An­glo and Free port both have prize as­sets in Latin Amer­ica — for An­glo, Chile’s Los Bronces, and for Freeport, Cerro Verde in Peru and a ma­jor­ity stake in the El Abra mine in Chile.

For now, an­a­lysts say Macken­zie’s com­ments could be aimed at putting the ac­qui­si­tions is­sue up for de­bate, well ahead of any deal — real or po­ten­tial. It is cer­tainly a fair dis­tance to any ac­tual deal, given the high price tags of re­cent ac­qui­si­tions.

The last three sig­nif­i­cant deals — most re­cently, the ac­qui­si­tion of an ex­tra stake in Freeport’s Morenci mine by Ja­pan’s Su­mit­omo Corp. — were done at an im­plied cop­per price of well over US$ 7,000 a tonne, bankers and an­a­lysts es­ti­mate, com­pared to cur­rent prices of closer to US$4,600.

That could make any deal a stretch for BHP, which needs to keep cagier in­vestors on board and is also try­ing to as­suage rat­ing agen­cies to keep its sin­gle A credit rat­ing.

“I think frankly that BHP and Rio are still trig­ger shy. But we are see­ing them on the edges — they are start­ing to ex­plore whether this makes sense,” a se­cond in­dus­try banker said.



An­drew Macken­zie, chief ex­ec­u­tive of BHP Bil­li­ton Ltd., speaks dur­ing an in­vestor briefing at the com­pany’s head­quar­ters in Mel­bourne, Aus­tralia on Tues­day.

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