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Eyes on Glencore Cash After BHP Disappoints on Buyback

BHP Billiton Ltd. CEO Andrew Mackenzie
Andrew Mackenzie, Chief Executive Officer of BHP Billiton Ltd., said he will now seek feedback from major shareholders. He attributed the slump in the company’s share price to “buy the rumor, sell the fact.” Photographer: Simon Dawson/Bloomberg

Can Glencore Plc make investors in the beleaguered mining industry happy after BHP Billiton Ltd. disappointed them?

After a decade of explosive commodities price gains fueled by Chinese demand, mining companies are dealing with slower growth by spurning mergers and cutting costs. Fund managers including BlackRock Inc. are demanding cash now rather than have money risked on another round of acquisitions and expansions that flooded metals markets with surplus production in recent years.

Glencore, the third-largest miner by value, may announce a share buyback when it reports earnings today, according to Citigroup Inc. and UBS AG. Its Chief Executive Officer Ivan Glasenberg, who has criticized competitors for building too many mines during the boom, has an extra $7 billion in cash after the sale last month of a Peruvian copper operation.

Other big miners are also targeting shareholder payouts. Barrick Gold Corp. says it’s now focusing on returns rather than production volumes. Earlier this month, Rio Tinto Group raised its dividend and said it’s on its way to becoming a “cash machine” as a cost-cutting drive starts to bear fruit.

BHP is trying to rationalize its portfolio of mines and smelters and yesterday announced a plan to spin out aluminum, coal, manganese and silver assets into a new company. Still, the company’s shares fell 4.9 percent in London, the most in more than two years, after it said it wasn’t ready yet to start returning cash to investors.

Intangible Benefit

“Although we think the demerger strategy looks sound and will likely benefit shareholders, it’s nowhere near as tangible as a share buyback,” Numis Securities Ltd. said in a note yesterday.

BHP is up 0.5 percent in London over the past 12 months, while Glencore has gained 19 percent and Rio 12 percent.

In 2011, as China devoured more iron ore and copper to feed its economic expansion, Melbourne-based BHP’s return on common equity was 45 percent, according to data compiled by Bloomberg. Three years later the return was 18 percent, the data show, as Chinese growth slowed.

The mining industry’s decade-long $616 billion investment spree was followed by asset writedowns and management clear-outs. It would be foolish for CEOs of the biggest companies to revert to the “damaging strategies of the last cycle,” BlackRock’s Evy Hambro, who manages the $8 billion World Mining Fund, said in e-mailed comments earlier this month.

Buyback Expected

Shareholders had expected BHP to announce a $3 billion buyback yesterday, according to Citigroup analysts, who cut their stock rating to hold from buy. BHP CEO Andrew Mackenzie said it would be premature to return more money.

“We’re not there yet in terms of what we thought the balance sheet would need to look like, and the projected future cash flows would have to look like, to start a new form of capital management,” he told reporters yesterday in London. “We are getting close.”

There’s potential for Baar, Switzerland-based Glencore to announce the return of less than $2 billion to investors, Credit Suisse Group AG analysts wrote in an Aug. 14 note. The company will report first-half profit excluding one-time items of $1.93 billion, according to the average of seven analysts’ estimates compiled by Bloomberg, compared with an $8.85 billion loss a year earlier.

BHP said yesterday its underlying profit rose to $13.4 billion in the 12 months through June from $12.2 billion a year ago. That missed the $13.6 billion median estimate. The company also raised its full-year divided 4 percent to $1.21 a share from $1.16 a year earlier, it said in yesterday’s statement.

Biggest Spinoff

The new, as-yet-unnamed company that BHP will spin off will be based in Perth and be headed by current Chief Financial Officer Graham Kerr. It may be worth about $15 billion when listed, according to CLSA Asia-Pacific Markets.

At that value it would overtake the $14.4 billion separation of Russian gold miner Polyus Gold International Ltd. from OAO GMK Norilsk Nickel in 2006 as the mining industry’s biggest spinoff, according to data compiled by Bloomberg.

BHP will prioritize iron ore, copper, coal and petroleum assets that stretch from Australia to the Americas, and has identified the soil nutrient potash for a potential fifth unit.

Mackenzie said he will now seek feedback from major shareholders. He attributed the slump in the company’s share price to “buy the rumor, sell the fact.”

“We have to have a few trading days before we think about what signals are being sent,” he said. “People have all the facts now and they are sorting themselves out.”

Peter Grauer, the chairman of Bloomberg LP, parent of Bloomberg News, is a non-executive director of Glencore.

BHP and Rio Tinto are the two largest mining companies.

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