Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is BHP Billiton (BHP) Too Big to Grow?

Companies / Metals & Mining Nov 22, 2010 - 06:21 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleJack Barnes writes: In the banking crisis we learned that a group of U.S. banking and insurance firms are allegedly "Too Big To Fail." Now the world's largest mining company BHP Billiton Ltd. (NYSE ADR: BHP) has grown so large it is struggling to make meaningful deals, introducing us to another phrase: "Too Big To Grow."


BHP's dilemma is not surprising. Its downside is that, as the largest mining company in the world, it has outgrown its roots. BHP's current management has shown it cannot pull off a major transaction while handling a company of this size.

Its heavy weight becomes an overwhelming force in any sector it applies its resources towards, which has caused the company to have its last three planned mergers stopped by regulation red tape. Nations are not interested in having their prime natural resource company swallowed up and then forgotten about by a mining behemoth.

BHP last week scrapped a $40 billion hostile takeover bid for Potash Corp. of Saskatchewan Inc. (NYSE: POT) after the Canadian government rejected the offer. BHP called off a $147 billion hostile bid for Rio Tinto PLC (NYSE ADR: RTP) in 2008 because of financial market turmoil, and a $116 billion iron ore venture with that company fell through in October due to regulator opposition.

The unsuccessful M&A deals aren't the only financial blunders the company has suffered.

In Canada, before BHP made the offer to purchase Potash, it was working on a project that would have become the largest potash mine in the world. The Jansen potash deposit is a world-class project with a development price tag of $10 billion or more.

After spending hundreds of millions of dollars, BHP decided to abandon the project, write off the costs associated with it, and make its offer for Potash. Now that the bid failed, BHP is again looking at developing Jansen.

It also has the stigma of the Western Australian Ravensthorpe nickel mine failure, which was supposed to cost the company around $1 billion but grew to around $3 billion in costs and write off expenses. The closing of the mine, less than a year after it opened, was so unpopular politically that BHP was forced to sell it for $340 million to Canada's First Quantum Minerals Ltd. (TSE: FM), which expects to start operations again in 2011.

If the new owners are able to produce it profitably in the future, BHP management should be forced to resign.

So BHP is an enigma. It was built from the merger of two of the largest mining concessions in 2001, and since then management has failed to execute on any project it's attempted.

The three strikeouts have caused the company to reevaluate its future, and with that change comes an opportunity to safely put some money to work, while enjoying a growing dividend. You see, BHP is too big to grow, but has a growing pile of cash that the company has no need for - which means it has to start to return capital to its investors.

That reality is already obvious to the board of directors, as they announced last week a reactivation of their multi-billion dollar share buyback program that was halted in 2007. The company said it would buy $4.2 billion of its shares under a $13 billion buyback program that had been suspended for three years. Look for BHP in the next year or two to announce a series of dividend increases, along with an increased share buyback.

BHP sports a market cap that is worth $234 billion, making it one of the highest valued companies in the world. It pays a 2.1% dividend, which is expected to grow in the near future.

If you compare BHP's performance over the past five years to the Standard & Poor's 500 Index, you'll see it returned 169.34% compared to the S&P's 4.3% decline - netting a nice profit for those investors who got in at the right time. So the question today is, is it time to book those profits, or buy more?

What the company is missing is a sure path toward a larger future. At the political level it is already too large. The company has a management that has not shown an ability to execute. It's going to have to focus on internal organic growth.

Let's do a quick review of BHP:

•It has suffered three failed merger attempts.
•It has abandoned two major development projects.
•It has growing future dividends.
•It has resumed its share buyback.
•It is seeing only slow organic growth.
While I like the assets that BHP holds internally, the management has been underwhelming in its ability to execute for shareholder future value creation. It's this reason and this reason only that I cannot put a buy recommendation on the stock.

Action to Take: BHP is a hold. It needs a new future path made clear to both shareholders and stakeholders. It has the properties to continue its path as the world's largest mining company. However, it will need to learn to execute on internal mega projects. If you own BHP, let's consider a covered call program for this position in your portfolio. You can generate a growing cash yield above the current dividend. It is going to be years before BHP is considered a sexy commodity stock again. It has shown that it is just too large to be a factor in future market M&A activity.

(**) Special Note of Disclosure: Jack Barnes holds no share or known exposure in BHP Billiton Ltd.

[Editor's Note: If there's one thing top global investors understand, it's that you have to "follow the money" to reap the benefits of the best profit opportunities that are available at any one time. Money flows point out the next profit opportunities. Sometimes that means "following the money" from one sector to the next. Other times that means moving from one geographic market to another.

To make those moves successfully, investors need a compass or, better yet, a guide. And successful investors will tell you, one of the best guides out there is The Money Map Report.

This monthly advisory service - an affiliate of Money Morning - employs many of the same experts whose columns you read here each day. The difference is that The Money Map Report's straight investment analysis. Our writers use proprietary money-flow indicators to identify and isolate the most timely profit opportunities you'll find anywhere. For more information about The Money Map Report, please click here.]

Source : http://moneymorning.com/2010/11/22/...

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in