Melbourne: BHP Billiton, the world’s biggest miner, plans to pour $80 billion into expansions over the next five years rather than chase ambitious takeovers, after nearly doubling first-half profits to a record on booming demand for iron ore and copper.
The Anglo-Australian company also said it would more than double its share buyback to $10 billion this year, bowing to investor demands to put its growing cash pile to work.
“The biggest surprise is the commitment to spend $80 billion over the next five years,” said James Bruce, portfolio manager at Perpetual Investments, one of BHP’s top 10 Australian shareholders.
“We think this demonstrates the challenges that the industry is having satisfying rising demand, while replacing declining production from mature operations,” he said.
Spurred by strong demand from China and India, BHP and its main competitors Rio Tinto and Xstrata plan to spend more than $110 billion on expansion projects over the next five years.
In 2011, the companies will target more iron ore and coal capacity in Western Australia and more copper capacity in Mongolia, Chile and Peru.
BHP chief executive Marius Kloppers, speaking after the miner announced a net underlying profit for the July-December period of $10.7 billion, said the firm’s preference was to spend on expansions given the difficulty in securing the large acquisitions it has been eyeing.
BHP has had to ditch three major deals over the past three years, including its $39 billion bid for top global fertilizer maker Potash Corp last year, due largely to regulatory concerns.
“In addition, where we currently stand in the commodity price cycle probably has increased price expectations for those assets,” Kloppers told analysts. “As one looks at a buy versus build equation, the clear opportunity for us is to continue to invest money in our organic portfolio.”
While Kloppers played down the prospects of any near term acquisitions, investors doubted deals were off BHP’s agenda.
“They’re on the backburner only to the extent that at the moment with today’s inflated commodity prices they would probably have difficulty finding anything which would create value for them. I’m sure they’d be looking,” said Peter Chilton, an analyst at Constellation Capital Management.
Kloppers forecast a strong outlook for commodities markets due to tight supplies, a factor he said industry analysts had long underestimated, but like Rio Tinto last week, warned prices could be volatile.
He also confirmed he had harboured concerns about Chinese and competitor espionage of his business, citing it as a reason behind his push for market pricing of key commodities such as iron ore.
The Sydney Morning Herald newspaper, citing diplomatic cables obtained from Wikileaks, said Kloppers once offered to trade intelligence with Washington on China after telling a US diplomat about the extent of Chinese surveillance of his firm at a time when he was pushing customers there to switch from closed-door annual price negotiations.
“One of the reasons we have pushed so hard for market-clearing prices is so that these sorts of things are not a concern,” Kloppers told reporters when asked to confirm if he was concerned about espionage from China and mining rivals.
Fuelled by record or near record prices for iron ore, copper and other metals, BHP’s attributable profit before exceptional items soared to $10.7 billion for July-December from $5.7 billion a year ago, beating an average forecast of $10.3 billion from 14 analysts.
First-half earnings from iron ore nearly tripled, while earnings from base metals, including copper, jumped 45%.
BHP’s $10 billion buyback, expanded from $4.2 billion, follows Rio Tinto’s plan to return $5 billion to shareholders over the next two years, which some investors considered too little.
Investors had high hopes for a big share buyback as the miner is nearly debt free, its cashflow is booming and its failure to complete major takeovers limit its expansion options.
In the two weeks leading up to the result, BHP’s shares rallied 9% to a 33-month high on expectations of a buyback. Its shares slipped 1.6% to A$46.59 in a flat broader market, partly as its dividend increase was disappointing to retail investors. London shares eased 0.5%.
BHP stepped up its interim dividend by 10% to 46 cents a share, below broker forecasts of around 49 cents.
“We would have liked to see more dividend, because we think that is of value to people who are continuing shareholders in the business,” said Ross Barker, managing director of Australian Foundation Investment Co, one of BHP’s top five shareholders in Australia.
BHP’s $80 billion expansion plan over the next five years includes expanding its Olympic Dam copper and uranium mine in Australia, with a decision expected in 2012 and the Jansen potash project in Canada.
Petroleum earnings, which set BHP apart from its mining peers, rose 23%.
BHP said sharp cost increases cut its earnings by $521 million. Kloppers said while materials cost increases were offset by price increases on BHP’s key products, labour shortages were starting to bite, particularly in engineering jobs in Western Australia where billions of dollars of iron ore and oil and gas projects are competing for manpower.