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COLUMN-Elliott's BHP plan was doomed, but the ulterior motive isn't: Russell
2017年4月12日 / 凌晨2点24分 / 5 个月前

COLUMN-Elliott's BHP plan was doomed, but the ulterior motive isn't: Russell

* BHP vs peers over two and 15 years: reut.rs/2oQXpNR reut.rs/2oQXCR9)

By Clyde Russell

LAUNCESTON, Australia, April 12 (Reuters) - When activist shareholder Elliott Advisors went public with its call to restructure BHP Billiton, it was most likely aware that the world’s largest mining company would reject the plan.

Elliott, which manages more than $32.7 billion and holds about 4.1 percent of BHP’s London-listed shares, wants the company to end its dual London-Sydney listing, hive off its petroleum assets in a separate listing in New York, and return more cash to shareholders.

By going public with the letter it wrote to BHP directors, Elliott should have known it had no chance of its proposal succeeding. Indeed, BHP soon shot down the plan, saying the costs would outweigh the benefits.

So why bother going to all the rigmarole of working out a restructuring plan, engaging the directors and then going public if there was little chance of success?

Elliott may have been looking for a short-term bounce in the share price, which was duly delivered with the Sydney stock rising 4.6 percent to a close of A$25.73 ($19.30) on April 10, the day the proposal was released to the public.

But more likely is that Elliott wanted to kickstart a debate on how best to unlock value in BHP, and put pressure on management to return more of the benefits of the recent rise in commodity prices to shareholders.

A valid criticism of BHP, and indeed other resource peers such as Rio Tinto, Anglo American and Glencore , is that shareholders largely missed out on the benefits of the massive China-led boom in commodity demand since the end of the 2008 global recession.

This is because the miners chose to expand operations at a cost of billions of dollars rather than return cash to shareholders.

In iron ore and coal, the massive surge in supply led to prices falling for five years from 2011-15, before supply and demand returned to a better balance last year, resulting in strong gains for many commodities.

If an investor has bought BHP shares in Sydney at the height of the post-2008 boom in commodities, they would still be under water.

BHP’s Sydney shares reached a closing peak of A$44.89 on April 11, 2011, before slumping to a trough of A$14.21 in January last year. They have since recovered to A$25.57 at the close on Tuesday.

BHP has underperformed its peers on a two-year view, but outperformed on a 15-year basis, according to Thomson Reuters data.

MANAGING THE CYCLE

The bigger question is how should the management and shareholders of a company like BHP deal with the inherent cyclical nature of commodities.

Certainly, most commodity booms are ended when too much supply is commissioned as the miners all expand operations at more or less the same time in order to chase the higher prices.

But equally there is a risk to not investing to boost production when competitors are - you may end up with a smaller market share and lower prices anyway.

It’s worth noting that since the recovery in commodity prices in 2016, when spot iron ore rose 81 percent and Australian thermal coal by 87 percent, major mining companies have been extremely cautious.

BHP, Rio and others have all committed in recent financial statements to maintaining strict cost discipline and limiting the amount of capital spending on new projects.

But it’s almost inevitable that the tables will turn and resource companies will be tempted to once again seek to ramp up exploration and develop new projects.

In some ways, they have to, merely to replace reserves that are being depleted, but whether this can be done sensibly remains to be seen.

Certainly the track record of resource companies is patchy in this regard. Witness the simultaneous construction of eight liquefied natural gas plants in Australia, the main effect of which was to drive up costs as companies competed for labour while at the same time causing the price of the fuel to slump.

This dynamic was mirrored in iron ore and coal, and to some extent in crude oil as well, with the emergence of U.S. shale producers in the past few years.

What Elliott may be trying to achieve is to keep pressure on BHP’s board and management to increase returns to shareholders while the company is generating strong cash flows off the back of higher prices for iron ore, coal and crude oil.

There may well be some merit in BHP spinning off its petroleum arm, much as it did with the aluminium and other non-core operations when it created South 32 in 2015.

But the irony is that by saying BHP should do this, Elliott has probably ensured they won‘t, as BHP’s board and management wouldn’t want to be seen doing something that they had earlier rejected.

The real test of whether Elliott’s intervention has had any impact will be how much more cash BHP decides to return to shareholders when it announces its next results, due in August this year.

Disclosure: At the time of publication, Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund. (Editing by Kenneth Maxwell)

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