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BHP May Add to $23 Billion in Share Buybacks as Profit Surges

BHP Billiton Ltd. may add to almost $23 billion spent since 2004 buying back stock as the world’s largest mining company seeks to deploy cash generated by record profit, analysts and investors said.

BHP said yesterday it completed a $10 billion share buyback, six months ahead of schedule. Spending that amount again would still leave scope for a $65 billion acquisition in the second half without “excessive” stress on the Melbourne-based company’s balance sheet, said Richard Knights, an analyst at Liberum Capital Ltd. in London.

Chief Executive Officer Marius Kloppers has had three deals totaling more than $100 billion aborted or rejected in the past four years including a bid for rival Rio Tinto Group and last year’s hostile offer for Potash Corp. of Saskatchewan Inc. BHP expanded its latest share buyback in February after failing to buy Potash. Investors may be in no rush to see more deal making.

“The investment community will certainly be telling management that if they can’t deploy that capital efficiently, then it should be returned to shareholders,” Tony Robson, an analyst at BMO Capital Markets in Toronto, said by telephone.

BHP is due to report 2011 fiscal year earnings on Aug. 24. Net income will jump 75 percent to a record $22.3 billion according to the average estimate of 14 analysts compiled by Bloomberg. Ruban Yogarajah, a London-based spokesman for BHP, declined to comment.

Dividends Increase

BHP, which also produces coal, oil and aluminum, has spent $22.6 billion buying back shares 15 percent of its stock since 2004 and has increased its dividend almost fivefold in the same period.

BlackRock Inc.’s Evy Hambro, portfolio manager of its World Mining Fund, said in a Bloomberg Television interview in April that BHP should start a new buyback once the current program was completed. BlackRock is the largest shareholder in the London-and Sydney-listed stock, according to data compiled by Bloomberg.

The shares have declined 3.3 percent in Sydney trading this year and 3.8 percent in London. The Bloomberg World Mining Index has dropped 6.1 percent this year, after increasing 27 percent in 2010 and 96 percent in 2009.

“Given the pullback in the market, it’s more likely than not that they do announce another capital management initiative,” Knights said in an interview.

Kloppers, 48, has continued to pursue takeovers after ending its pursuit of Potash. BHP agreed to buy Chesapeake Energy Corp.’s Fayetteville shale-gas assets for $4.75 billion in cash on Feb. 22, more than doubling its U.S. oil and gas reserves.

‘Twice Bitten’

“Twice-bitten in this instance, third time shy,” Charles Kernot, director of metals and mining at Evolution Securities in London, said by telephone. “If he is going to do anymore M&A, it’s got to be, I suspect, more along the lines of the shale-gas transaction that they completed rather than any hostile approach.”

Expanding in energy would likely lead to fewer regulatory obstacles for BHP compared with mining, Paul Cliff, an analyst at Nomura International Plc, said by phone. Woodside Petroleum Ltd. may become a more attractive target should its shares stay “depressed” following cost increases and a delay at the Pluto gas venture, Credit Suisse Group AG analysts including Sandra McCullagh in Sydney wrote in a report last week.

Woodside, Australia’s second-largest oil producer, has been the subject of takeover speculation since Royal Dutch Shell Plc sold part of its stake in 2010. Woodside, which had a market value of A$32.4 billion ($35 billion) at the close of Sydney trading today, would be the “most logical choice” for BHP because of the potential cost savings following a merger, Nomura’s Cliff said.

‘Spend Wisely’

“All cash should be spent wisely if there’s no sensible project that they feel is going to deliver its cost of capital and the return,” Shaun Manuell, who helps oversee about $1 billion in Australian stocks at Equity Trustees in Melbourne, said by phone. “BHP should look for good projects that will generate good cash return otherwise go for more capital management.”

Mining takeovers reached the second-highest value on record last year, worth about $148 billion, according to data compiled by Bloomberg. In the first half, the value of deals was about $78 billion.

“If they’re happy with that outlook and the cash flow is well above the capital requirement, I think they’ll continue to introduce additional capital management initiatives as they see fit,” Tim Schroeders, who helps manage $1 billion in global equities as a portfolio manager at Pengana Capital Ltd. in Melbourne, said by phone.

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