(Repeats with no changes to text. The opinions expressed here
are those of the author, a columnist for Reuters.)
* BHP vs peers over two and 15 years: reut.rs/2oQXpNR
By Clyde Russell
LAUNCESTON, Australia, April 12 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
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
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
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
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
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)