some were during the week speculating why BHP was off loading SA coal assets, this was in yesterdays Courier Mail and Herald Sun. What sometimes seems a bargain can turn into the stuff of nightmares , and while CCC management have shown greatness in deal making in the past, you want to at all times avoid the sucker punch. urge caution.
source courier mail Thursday 17th feb and Herald Sun, http://www.heraldsun.com.au/business/terry-mccranns-column/bhps-takeover-of-billiton-becomes-100-billion-giveaway/story-e6frfig6-1226007197799
BHP Billiton's operations in Pilbara: BHP gave away $100 billion ... to buy assets that generated zero. Source: AFP
BHP's takeover of the South African Billiton Group 10 years ago has turned into the greatest destruction of shareholder value ever seen in Australia and among the worst in the world.
So bad, that it makes its great rival Rio Tinto's disastrous purchase of the Canadian Alcan aluminium company look almost inspired in comparison.
In very simple terms BHP gave away $100 billion of today's equity to buy assets that in the latest six months, in the middle of the greatest commodities boom the world has ever seen, generated almost zero earnings.
Indeed, if they generated positive earnings at all.
What BHP bought with Billiton was essentially aluminium and energy coal operations in southern Africa.
In the latest six months those two divisions contributed a total EBIT of just $351 million, or just 2.4 per cent of the group EBIT of $14,829 million.
Further, those two divisions include both aluminium and energy coal operations in Australia that would almost certainly have generated positive earnings in the latest six months. That suggests that the old Billiton assets might have generated earnings even closer to zero. Indeed they could even have been in the red. To stress again, in the middle of the greatest commodities boom we have seen.
BHP gave the former Billiton shareholders 42 per cent of the equity in the combined group for assets that to all intents and purposes are making zero profit and with very little prospect of making much more going forward.
BHPB's aluminium division -- aluminium was the "jewel" in the dodgy crown of the old Billiton -- made all of $17 million in the half. At least Rio's aluminium division made $770 million, albeit for a full year.
BHPB's energy coal posted an underlying EBIT of $334 million, and from the company's comments the Australian operations had a very good half.
The disaster and its scale has been hidden by the boom in earnings of the -- old -- BHP, thanks to China. But what it means is that BHP could have been generating much the same profit on just 58 per cent of the equity it actually has on issue.
That is to say, making a crude calculation, BHP shares should arguably be trading at $80 and not $46.60. The difference is more than $100 billion now that is NOT in the pockets of the BHP Australian register shareholders.
Now true, it's all come about by the explosive growth in China which no-one saw or arguably could possibly have seen back in 2000. And which in particular has turned iron ore into a superstar.
In the latest half BHPB's iron ore revenue more than doubled to $9.4 billion. It now comprises 27 per cent of group revenue. Last December half it was only 18 per cent.
Even more incredible was the near-tripling in iron ore EBIT to $5.8 billion. So that lumpy old iron ore now has an EBIT margin of 62 per cent. 62 per cent!
That's almost up there with the monopoly margins Telstra used to make on home phones in its good old days!
The base metal's -- copper -- performance was as spectacular in the more traditional commodity boom way. That's to say $1.1 billion of a $1.6 billion revenue increase stuck to the operating bottom line.
Now clearly if China hadn't "happened", both the amount of equity and its today value that BHP threw away on buying what were always second class assets in Billiton (and that's being generous) would have been much smaller figures.
But China did happen and it has cost continuing BHP shareholders more than $100 billion of value. And it is hugely relevant as BHPB prepares to spend $80 billion, going on $120 billion over the next four years.
The $80 billion figure was the one given by CEO Marius Kloppers in his presentation yesterday. That's if everything goes ahead. About $40 billion of that is pre-feasibility and "options".
My extra $40 billion is if BHPB makes the big buy that it "has to" if the cash keeps rolling in at today's rates. I still maintain it will and it will be Woodside.
If the cash keeps rolling in at today's rates, BHP will essentially spend it and -- all other things remaining equal -- still be debt free in 2015. Even a $40 billion purchase would leave it heavily under-geared.
This suggests there will be further buy-backs like today's $10 billion one.
CCC Price at posting:
77.0¢ Sentiment: Hold Disclosure: Held
