BHP may need $10 bil­lion stock sale

The Pak Banker - - COMPANIES/BOSS -

BHP Bil­li­ton Ltd. needs to raise as much as $10 bil­lion in a sale of new stock to its in­vestors if it wants to keep its credit rat­ing, ac­cord­ing to the top-ranked an­a­lyst cov­er­ing the world's big­gest min­ing com­pany.

As prices for key com­modi­ties such as iron ore and oil have tum­bled, BHP's stated goal of re­tain­ing its A+ credit rat­ing at Stan­dard & Poor's and A1 rat­ing at Moody's In­vestor Ser­vice is un­der pres­sure, Richard Knights of Liberum Cap­i­tal Ltd. wrote in a note on Fri­day. Rais­ing $5 bil­lion to $10 bil­lion through a share sale to ex­ist­ing in­vestors is re­quired to fill the short­fall in cash flow to keep the rat­ing, he said.

"Slash­ing cap­i­tal ex­pen­di­ture and even cut­ting its div­i­dend to zero are not suf­fi­cient for BHP to re­al­is­ti­cally re­tain a 'solid A' credit rat­ing, if spot com­mod­ity prices and cur­ren­cies per­sist," said Knights, who's the top ranked an­a­lyst cov­er­ing BHP's Lon­don shares ac­cord­ing to Bloomberg data. "Given the com­pany con­tin­ues to be mar­ried to the idea of a 'solid A' rat­ing through­out the cy­cle, a rights is­sue looks likely."

Min­ers have been bat­tered by head­winds from slow­ing growth in China, their big­gest cus­tomer, and gluts in me­tals to en­ergy mar­kets. That's forced com­peti­tors to scrap div­i­dends and sell as­sets, while smaller ri­vals such as Glen­core Plc and Freeport McMoran Inc. have al­ready sold shares to strengthen their fi­nances. Mel­bourne-based BHP spokes­woman Eleanor Colonico said the pro­ducer de­clined to com­ment on Liberum's note.

Last month Moody's put BHP's rat­ing on re­view for a pos­si­ble down­grade, cit­ing the prob­a­bil­ity of weak com­mod­ity prices per­sist­ing for years that would sig­nif­i­cantly re­duce its earn­ings and cash-flow gen­er­a­tion. "What we are com­mit­ted to through­out all con­di­tions is a strong bal­ance sheet," BHP Chair­man Jac Nasser told in­vestors at the com­pany's an­nual meet­ing in Perth in Novem­ber. He added that a de­ci­sion on its div­i­dend would not be made un­til Fe­bru­ary.

The Mel­bourne-based miner could raise as much as $15.4 bil­lion through a share sale to al­low it to buy as­sets of dis­tressed ri­vals, Bank of Amer­ica Corp. an­a­lyst Ja­son Fair­clough wrote in a note to clients ear­lier this month. Such a sale might ac­cel­er­ate the dis­tress of more in­debted com­pa­nies in the in­dus­try and force the sale of qual­ity mines, ac­cord­ing to Fair­clough.

While in­vestors would likely sup­port a share sale aimed at rais­ing cap­i­tal for an ac­qui­si­tion, there prob­a­bly would be less back­ing if such ac­tion was to bol­ster BHP's bal­ance sheet on con­cern price de­clines will per­sist, Michelle Lopez, a Syd­ney­based in­vest­ment man­ager at Aberdeen As­set Man­age­ment Ltd., which holds the pro­ducer's shares, said by phone. "There's still a lot within their own means that they can do, so I don't agree that this would be the right time to be rais­ing cap­i­tal at all if it's just for pru­dence," she said.

In ad­di­tion to a cut to its div­i­dend, BHP has op­tions to make fur­ther re­duc­tions to cap­i­tal ex­pen­di­ture and to con­tinue to trim op­er­at­ing costs, said Lopez. "Given the op­tion­al­ity ad­di­tional cap­i­tal would give BHP around M&A at this point in the cy­cle, we feel a raise at the higher end of this range is more likely," Liberum's Knights wrote of his $5 bil­lion to $10 bil­lion es­ti­mate.

"The threat of a cap­i­tal call will weigh on the shares." BHP shares have dropped 15 per­cent this year in Lon­don, par­ing its mar­ket value to about $51 bil­lion. The dual-listed stock rose 7.5 per­cent, the most in six years, to A$15.26 in Syd­ney trad­ing Fri­day, af­ter jump­ing 11 per­cent in Lon­don a day ear­lier.

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