BHP Billiton's huge wealth destruction hits shareholders, taxpayers
A lot has happened to the world’s biggest miner BHP Billiton over the past five years, and none of it good.
The wealth destruction has been on an epic scale, hitting shareholders and taxpayers alike.
Then there are inhabitants downstream from the Samarco mine disaster who saw friends, family and entire communities swept away under a massive deluge of mud late last year.
Back in August 2011 when full-year results were posted, shares were trading around $40 a share and the company had a market value of $200 billion.
It is now worth $20 a share.
Whoops, there goes $100 billion in shareholder value for a start.
To be fair BHP spun out the second tier South32 operation but, valued at $10 billion, it is small change and, in investment terms, so far it is a fizzer.
Some of the wealth destruction was bad luck; a big chunk was really bad management.
BHP hit peak with a $6 billion taxpayer funded share buyback
Back it up a few months from the 2011 result to April 2011 when BHP hit its peak just shy of $45 a share and that is where the story starts.
That peak coincided with the completion of $6 billion off market buyback of shares.
The only identifiable winners in the saga are the canny – often zero tax-paying – shareholders who sold into the buyback.
Those lucky enough to sell then received a tax-free $50 a share gift; roughly $10 in capital, $30 in dividends and a $10 tax rebate.
Yes, that is right, the taxpayers of Australia forked out around $10 a share to a big chunk of investors to facilitate the transaction.
Given the (understandably) heavily over-subscribed deal bought back 147 million shares, it is not difficult to see that the deal cost taxpayers many hundreds of millions of dollars, and probably well above $1 billion.
In hindsight, it seems an odd and remarkably generous decision to reward those who chose to cut and run.
Those shareholders who decided to stay and fund the company’s future growth – and rely on a dividend policy that promised never to cut payouts – have been badly burnt.
That unsustainable magic-pudding was thrown overboard in February this year after an $8 billion first-half loss.
The impact was full-year dividends less than a quarter of those in the previous financial year, at just 30 cents per share.
BHP‘s goes from record Australian profit to huge loss in five years
Just how much of the commodity price crash was foreseeable is debateable, but about every big decision BHP made leading up to China rolling over and the sudden glut in iron ore, coal, oil and gas developing has exacerbated the company’s problems.
To say BHP is sensitive to commodity and currency swings is a massive understatement.
On BHP’s figures a $US1 a tonne movement in iron ore prices equates to $148 million dollars of profit.
For oil, $US1 a barrel changes delivers a $US52 million dollar impact.
BHP Billiton sensitivity to prices
|Approximate impact on FY16 net profit from change of||$USm|
|$US1/t in iron ore price||148|
|$US1/bbl in oil price||52|
|$US/t in metallurgical coal price||25|
|$US1/lb in copper price||23|
|10 US cents/MMbtu on US gas price||19|
|$US1/t in energy coal price||11|
|$US 1/lb in nickel price||1|
|Australian dollar (US c/$A)||64|
Source: BHP Billiton, August 2015.
Given iron ore prices have crashed peak to trough from $US190 a tonne in early 2011 to below $US40 a tonne earlier this year, and oil has done something similar tumbling more than 75 per cent from $US125 a barrel to $US30 a barrel over the same period, the impact on profitability was always going to be devastating.
BHP’s profit peaked at $22.5 billion in 2011 – an Australian corporate record.
Five years on it now holds the record for the second biggest loss at $8.3 billion – behind Rupert Murdoch’s $11 billion Gemstar inspired doozy in 2002.
Nonetheless it is a eye watering $30 billion bottom line capitulation in a very short period of time.
Shareholders and taxpayers ‘completely shafted’
The Federal Government has a lot riding on what has traditionally been one of its largest taxpayers.
From Treasury’s point of view a $US10 variation in iron prices will swing the budget $1.4 billion – either for better or worse – in 2017 and $3.9 billion the year after.
In 2015 BHP paid a tad over $US5.2 billion ($6.7 billion) in taxes and royalties in Australia with $US1.9 billion ($2.5 billion) going directly to Commonwealth coffers.
While this year’s result is yet to break out the impact on Australia, globally BHP received a tax benefit of around $US1 billion in 2016.
Indeed tax rebates were something of a growth engine in profitability.
What is undeniable is that the timing of BHP’s decision to spend billions on onshore US energy assets and billions more on expanding iron ore production was disastrous.
Having invested at the top of the market, billions of dollars are now being routinely written off the value of these investments such as the pre-tax $10.6 billion impairment to US shale assets earlier this year (or post-tax $7 billion, and another hit to taxpayers) and $4 billion in July last year.
The iron ore expansion has not been any happier, although BHP at least has had company in that folly.
2MG Asset Management’s Mike Mangan tallied up the sums to the end of 2015 and found the big miners BHP, Rio Tinto and Fortescue had spent around $US28 billion on capex and managed to shred $US19 billion in annual profits.
“This would have to go down as one of the biggest industry own goals since newspapers declined to fully embrace the internet, actually probably worse,” Mr Mangan said.
Their shareholders – and Australian taxpayers – have been completely shafted.
The cost of the disastrous joint venture with Brazil’s Vale is yet to be fully realised.
A post-tax impairment of up to $US1.3 billion was booked in July on top of an earlier $US1.2 billion charge and there will be ongoing remediation costs well into the future.
Just how much it will ultimately cost is a very open question as the joint venture partners still face legal actions which range in value from $US6.2 billion to $US48 billion being brought by the federal prosecutors office in Brazil.
Active investors not rushing in to buy
The overall damage to investors who have stuck it out is difficult to assess.
Some are still hanging in believing that if you have to have exposure to resources, then BHP provides a diversified portfolio – a one stop shop to the commodities game.
Others are not so sure.
Clime Investment’s John Abernethy said from an active fund mangers’ point of view – those investors not mandated to invest in large index stocks – most would have a zero stake in BHP now.
“Are they on the buy trigger, panicking? No, there’s no reason to buy and there’s little evidence of growth in the company over the next couple of years,” Mr Abernethy said.