Global investment manager BlackRock drew media attention when it sold off about £512 million worth of Anglo-Australian miner BHP Billiton (BLT). A major shareholder of the company, the investment manager reduced the exposure in its World Mining Fund from 10% to 6.5% by selling shares listed on both sides of the equator.
A number of fund managers have also moved to reduce their stake in the mining giant, particularly in Australia. Fidelity Worldwide Investments, as well as Australian firms Investors Mutual and BT Investment Management have all sold off a number of shares, albeit not on the same scale as BlackRock. But it seems that UK investors are more sanguine in their view of the miner than their Australian cousins.
Australia-based David Whitten, executive of 90West Asset Management and former global head of Colonial First State’s resources team has been investigating this issue. "I have done some work on the relative value of the stock between the London Stock Exchange and the Australian Securities Exchange," he says. "There has been a marked change and what I think has happened is that the UK investors in BHP have a much more favourable outlook than the Australian investors." Whitten himself believes BHP is attractive, particularly on a valuation basis.
BHP may now be seen as an ex-growth story, but that is distinct from whether or not it is a good investment, according to Morningstar senior resources analyst Mark Taylor. "Morningstar has always held the belief that investing in a company is based on long-term fundamentals and value drivers. Earnings are lower, but we believe the company still represents value," Taylor says.
Russell Investments portfolio manager Scott Bennett currently sees BHP as a "contrarian value opportunity".
"The stock has been heavily sold over the past 12 months given the slowdown in China and the impact on its earnings. However, our index methodology suggests the current valuation discount represents a good long-term buying opportunity for investors," he says.
Indeed, Morningstar's Taylor notes the market may not always be right and says it often has issues with stocks that are perceived as low growth, even though these stocks offer good value.
Cost Pressures
Despite the cost concerns regarding its current capital projects, Taylor says BHP has always said it would invest across a market cycle. Having said that, Taylor notes BHP has indicated it will be thinking carefully about its investments in projects, the Olympic Dam being a case in point.
There is speculation the company could be looking to halt the estimated US$30-billion project. "Return on capital is always hard with inflated capital costs. Many question whether it should be pouring in billions of dollars for expansion's sake and not delivering the same rate of return," Taylor says, though he personally doesn’t believe the company will pull the pin on the project.
"The project is world class and it will take years to bring it into line. It is such a long-term project, so even if capital costs are high, these costs could weaken in years to come," Taylor says.
As a former geologist, Whitten finds it amusing when people talk about the costs associated with large-scale mining projects. "That's the funny thing about mining. I have seen a lot of projects in my time and people get hung up on size and costs," Whitten says.
"This project requires the next stage of investment in order to get it producing the bulk required to boost supply and reduce unit costs."
BHP's potash mine in Canada has also garnered concerns among institutional investors and analysts. Taylor wouldn't be surprised if this project is reined in because "potash is such a niche market and you would not want to be a big player in a small market".
Australia, where BHP hosts much of its operations, is also seen as a high-cost country, which will obviously have an impact on BHP's capital projects. The recent closure of the firm’s Norwich Mine in Queensland was seen as a cost-saving exercise although, according to Taylor, "in the grand scheme of things the move was very small".
Whitten, however, says costs are also rising in other countries, including China. He also notes that companies like BHP tend to weigh up the benefits of producing in lower-cost countries with political and sovereign risks.
"What I really like about BHP [and Rio Tinto (RIO)] is they have a disciplined approach to investing and managing their capital projects," Whitten says. "They won't go willy-nilly into every part of the world, including high-risk countries. There are some fantastic projects in the Congo at the moment, but at the same time, the sovereign risks there are also very high.”
"Concentrating their projects in countries like Australia, the United States and Canada brings stability to their investment projects," he adds.
It's not just the costs surrounding current capital projects that are worrying investors, but also what they see as being some ill-conceived buying decisions.
Shopping with Marius
Under the tenure of chief executive Marius Kloppers, BHP has embarked on a number of less than successful acquisitions. Memories remain of the miner's failure to buy Rio Tinto in 2008.
The company repeated a similar hostile takeover attempt when it tried to buy the Potash Corporation of Saskatchewan in 2010. BHP's purchase of Petrohawk was also seen by many analysts as something of a failure, with the market generally expecting a write-down of the asset this year.
The purchase of Petrohawk was made as part of the miner's bid to expand its shale gas assets. However, the acquisition was finalised amid falling gas prices.
Even Kloppers acknowledged he might have delayed the decision to buy the firm when discussing the BHP's interim profit results in February.
Morningstar’s Taylor says views about the viability of a company's acquisition strategy are always based on short-term opinions. "When BHP bought into the company, shale gas was trading at $4. Now, the gas prices are $2. At this stage, the current gas prices indicate there are short-term pressures in the gas markets in the United States," Taylor says.
"Did they buy at the wrong time and pay too much? In the near term, I don't think so. It just seems like it now because they have been smacked by falling gas prices. No one has a crystal ball to predict when markets will boom."
Whitten even thinks the Potash Corporation of Saskatchewan was the "right thing to acquire" even if the execution was wrong. "It was a great strategic move, but the execution may have not been good. The idea behind it was tremendous and I believe BHP will be expanding its projects in this area," he says.
Higher Dividends Would Be Welcomed
Morningstar Australia columnist Ian Huntley has been quite vocal about BHP's reluctance to give its shareholders a little more in the way of dividends.
Morningstar recently conducted some analysis that indicated the firm could still maintain capital for growth projects while upping its payout ratios. Taylor is sympathetic to the view that higher dividends could be achieved but says the miner also likes to maintain a progressive dividend policy.
"Such a dividend policy reflects the fact that earnings are cyclical. BHP prefers to pay out reliable dividends rather than linking its payout policy to the cyclical nature of its business, which will see dividends go up and down," he says.
China Concerns
The general view regarding BHP's growth outlook amid a slowing China is that China's shouldn't have a huge impact on BHP.
Whitten says the recent quarterly production announcement from BHP further supports the view that the miner is on track to meet supply and that investors should not get too perturbed by a slowing China, as it is still growing from a large base.
BHP has "not made too many mistakes", Whitten says, though he acknowledges the company has a modest debt position and is positioned to grow in other areas.
"I think the market may underestimate the growth from potash. I can see more money being spent there and we may even see the company expand into other soft commodities," he says.
