Is BHP Billiton too big to grow?

• In February 2008, shortly after mr. Kloppers took over as CEO, BHP did a hostile takeover bid for its largest rival: Rio Tinto. The offer, worth approx. $165bln, was withdrawn in November 2008 after regulators indicated the deal would not gain anti-trust approval and the access to debt dried up in the capital markets.
• After the failed acquisition, the two companies agreed to try to realize a significant part of the synergies the merger would have created by setting up a Joint Venture to develop the Pilbara iron ore deposit in Western Australia. However, after both Australian and European regulators indicated this would create an iron ore player that would be too dominant, the plans were cancelled last month.
• The $39bln offer for PotashCorp appears to be a move in which BHP Billiton does not build up a dominant position in any market. If BHP manages to break the cartel-based pricing system for potash the deal might actually benefit the world economy. Still the Canadian government seems to be inclined to let the deal stall to protect the domestic industry and tax revenues.

Implications:

• BHP Billiton has approx. $12bln cash on the balance sheet and is earning more cash rapidly due to the high iron ore price. Typically mining companies need approx. 2-3% of asset value in operating cash, leaving BHP with some $10bln excess cash. The low leverage and the high credit rating of the company enable it to raise at least $30bln additional cash by increasing debt. However, it is hard to select acquisition targets that might actually lead to a combination that will be approved by regulators.
• The company will either need to focus on acquiring large players in markets where it does not have a strong presence yet, or focus on acquiring many smaller players or individual assets. As the company is trying to reduce the portfolio complexity, expansion into completely new markets is unlikely. Potential acquisition targets might be Newmont, Goldcorp, Freeport-McMoran or Eldorado in the gold market and Eramet, Inmet Mining and Outokumpo in the base metal market. Expansion into the industrial minerals sector would also be an option.
• The best way for mr. Kloppers to make a name for himself would be to make BHP Billiton the first major western mining company to build up a strong operating presence in China and/or India. Creating a Joint Venture with a local player might be the best option to achieve this.

©2010 | Wilfred Visser | thebusinessofmining.com