Biggest Miner Adds $10 Billion in Boost to M&A War Chest

  • BHP Billiton CEO sees dividend cut increasing deal firepower
  • Oil and copper assets are key targets for acquisitions: BHP

What’s Behind BHP’s Dividend Cut?

BHP Billiton Ltd. gave notice Tuesday that it’s on the hunt for assets after tipping an estimated $10 billion extra cash into its coffers by cutting its dividend and capital spending.

The world’s biggest mining company bowed to pressure from investors and credit ratings agencies by lowering its dividend payout for the first time in 15 years after the rout in commodities saw first-half profit tumble 92 percent. A new dividend policy will also give BHP more M&A firepower, with oil and copper the main targets for any acquisitions, Chief Executive Officer Andrew Mackenzie told reporters on a call from Melbourne.

QuickTake Iron Ore

“Investors for months have been telling the company not to pay the dividend and instead to focus on growth, to go out and buy something and be counter-cyclical,” Peter O’Connor, a Sydney-based analyst at Shaw and Partners Ltd. said by phone. “That said, M&A is fraught with difficulty. It’s not often that you buy well.”

BHP will face stiff competition. Distress from the commodity-price rout may soon spread from small mine operators to industry majors, forcing desirable assets on to the market and spurring deals, Rio Tinto Group CEO Sam Walsh told Bloomberg Television earlier this month.

‘Always Alive’

“We are always alive to opportunities to acquire tier-one assets,” Chief Financial Officer Peter Beaven said in a Bloomberg Television interview from London on Tuesday. “Tier-one assets are rare in the world of mining and when people get hold of them they hold on to them. We are on the lookout.”

Still, not many high-quality assets are for sale and the probability of BHP making such a deal is “on the low side,” Beaven added. Rivals would need to be “really distressed to put up the absolute tier ones in the commodities that we favor,” he said.

Sumitomo Metal Mining Co. last week paid $1 billion to boost its stake in a Freeport-McMoRan Inc. copper project in Arizona, signaling there’s plenty of buyers. The Freeport deal shows “quality assets are going for healthy prices,” said Tim Schroeders, a Melbourne-based portfolio manager at Pengana Capital Ltd., who helps oversee about $1.2 billion in assets, including BHP shares.

Private equity funds and trading houses may be better placed to swoop on distressed assets, he said.

Difficult Timing

“The timing is difficult for the companies, as their mantra is to generate free cash flow and to not do anything stupid,” Schroeders said by phone.

Energy investors from firms including Carlyle Group LP and Blackstone Group LP expect oil and gas deal making to increase this year as producers face a cash crunch. Private equity firms have raised more than $20 billion for energy deals in the past two years.

BHP’s first-half dividend was cut to 16 cents from 62 cents a year earlier and the company said it will adopt a policy to provide payouts at a minimum of 50 percent of underlying attributable profit. The savings will liberate about $10 billion of cash by July 2017, with $6 billion coming from the dividend policy change, $3.5 billion coming from reduced capital expenditure and $1 billion from lower costs, according to Shaw and Partners. BHP declined to set out the total likely to be saved through 2017.

Best Placed

The new dividend policy “allows us a lot more flexibility and optionality, if you like, in how we use our strong cash flow so that we can actually take advantage of what we think will be a number of critical opportunities,” Mackenzie told reporters. “It means we have more money to think about acquisitions, you know, as tier one assets become available.”

Rio Tinto and BHP are among the best placed to grab assets sold by rivals desperate to stem losses or pay down debt, Aberdeen Asset Management Plc, said last month. Rio Tinto should focus on buying floundering rivals to secure copper mines instead of building new ones, according to Sanford C. Bernstein Ltd.

Deals are now a priority over internal projects, as the price collapse squeezes competitors and creates rare opportunities to acquire quality assets, Mackenzie told investors and analysts on a webcast from Melbourne. “They would clearly get preference, relative to organic investments that could wait,” he said.

Valuations of the most prized assets are holding up even as commodity prices slide, according to Shaw and Partners’ O’Connor. “They are not going to get things as cheap as they think. Good assets will still get good prices, fair value at least,” he said.

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