BHP Has M&A Capacity as Xstrata, Glencore Combine, CEO Says

BHP Billiton Ltd., facing a new threat from a combined Xstrata Plc and Glencore International Plc, flagged to rivals the world’s biggest mining company has the firepower to keep making acquisitions.

“Obviously the balance sheet has got some capacity,” Marius Kloppers, chief executive officer of the Melbourne-based company, said today on a first-half earnings media conference call. “M&A is an opportunistic thing. If you have got the capacity in the balance sheet, if there is an opportunity that comes by and you have got the capacity, then you can exercise that,” he said.

Glencore’s $39 billion takeover offer for Xstrata will create the world’s fourth-biggest mining company and heighten competition against the big three global miners, BHP, Rio Tinto Group and Vale SA. The energy and mining industries are likely to lead growth in mergers and acquisitions this year, Clifford Chance LLP said last month.

“Now that Xstrata and Glencore are merging, if they do successfully bed that marriage together, they will obviously be looking to utilize their significant capital base to take greater influence across some of the commodity sectors,” Jamie Spiteri, head dealer at Shaw Stockbroking Ltd. in Sydney, said by phone. “BHP and Rio will be conscious of the fact that there’re competitive forces out there for key commodities.”

‘Bigger Size’

The combined Xstrata and Glencore would have competitive advantages to do deals because of its bigger size, Ian Henderson, a fund manager at JPMorgan Asset Management, who holds Xstrata shares, said yesterday. Global mining deals swelled to $98 billion last year, the highest level since 2007, from $76 billion in 2010, according to data compiled by Bloomberg.

BHP, which UBS AG forecasts will generate $29.4 billion in operating cash flow next fiscal year and have net debt of $13 billion, last year spent $16.9 billion on shale gas, acquiring U.S. explorer Petrohawk Energy Corp. and assets from Chesapeake Energy Corp. BHP could target the copper, energy and potash industries for further acquisitions, Kloppers said in August. The company scrapped a $40 billion bid for Potash Corp. of Saskatchewan Inc. in 2010.

“They have shown that they are in a position to seek opportunities through acquisition but it will be very selective,” said Shaw’s Spiteri. “It will be more likely to be associated in some of the key commodities where they want to maintain a dominant position.”

BHP was a different type of company to the proposed Xstrata-Glencore combination, said Kloppers, adding that the merger doesn’t make any difference to BHP’s strategy. Baar, Switzerland-based Glencore is the world’s largest publicly traded commodities supplier with a global trading network for energy, metals and farming products.

‘Different Space’

“We only invest in tier one, long-life, low-cost assets. We will not invest money in anything that doesn’t fall in that box,” Kloppers told reporters on the call. “Our strategy is to drive the transparency in our industry in pricing upwards, which again puts us in a different space to the Glencore part of the Glencore-Xstrata combination.”

BHP announced a review of its diamond business last November, saying it will probably sell some, or all, of the unit, and agreed the following month to sell its 51 percent stake in a Canadian diamond project to Peregrine Diamonds Ltd. Kloppers said in December that it may trim some of its assets and products in the next decade as spending increases on shale gas, iron ore, coking coal and potash. It won’t make big investments in nickel and aluminum, he said.

The aluminum business, valued at $7.7 billion by UBS, made an underlying loss of $67 million in the first half, while earnings in the stainless steel materials business, including nickel, fell to $1 million.

“We continue to rationalise the portfolio, both by prioritizing our capex by divesting some assets, and then by the rationalization actions if assets lose money,” Kloppers said.

BHP today reported a 5.5 percent drop in first-half profit to $9.9 billion, the first decline since 2009, as rising costs and lower output and prices halved base metals earnings.

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