MINING FINANCE / INVESTMENT

Veteran broker accuses BHP Billiton of destroying own wealth with bad decisions

From aborted takeover attempts for Rio Tinto and Potash Corp and what is seen as a disastrous successful one for Petrohawk, BHP Billiton is accused of making many bad decisions at an Australian conference..

Author: Kevin Skinner
Posted: Monday , 30 Apr 2012

Adelaide - 

A veteran stock broker says the disappointing share performance in the past couple of years by the world's biggest miner - BHP Billiton - in the midst of a once in a lifetime mining boom, has confused many investors and the equities markets.

Addressing the first day in Adelaide today of the Paydirt 2012 South Australian Resources Energy & Investment Conference, Taylor Collison Limited Director, Michael Whiting, said that despite its massive generation of cash flows, BHPB's share price had slumped from $45 this time last year to $35 now.

"The equities market has the right to ask - what is going on?" Mr Whiting said.

"In my 30 years of stockbroking, I have never seen any company make so many bad decisions as BHPB. It is a tribute to their core assets that they have been able to ride through the massive destruction of wealth that our biggest company has put its shareholders through," he told delegates.

"These bad decisions range from the aborted takeover bid of Rio at the peak of the market pre-GFC, the aborted takeover of Potash Corp of Canada, the aborted merger of its Iron Ore division with Rio to last year's disastrous takeover of the American Shale Gas Company (Petrohawk) for more than $13 billion at the absolute peak of the market.

"The Potash Corp and iron ore merger plans alone cost $750 million.

"At the time of the American Shale Gas deal, US gas prices were around $10 a gigajoule. It is now around $2 a gigajoule and the whole gas ball game has changed in the United States.

"BHPB will need to write down many many billions of dollars on that investment alone."

Mr Whiting said this scenario was enormously disappointing for shareholders but even those actions paled against what he said was the single largest transfer of wealth in Australian corporate history.

"BHP's takeover of the then South African company, Billiton, saw some 42% of BHP given to Billiton shareholders for a group of assets that is worth a fraction of what was paid.

"They may be the world's biggest miner but at this stage and on past performance, good management is not one of BHPB's assets."

On the broader equities market outlook, the Taylor Collison Director said his view was a very low growth environment for some time.

"The risks are greater out there now than previous recessions, revenue growth and profit growth is going to be subdued and investors need to get used to that," he said.

"The chances of our market returning to pre GFC highs are remote and in my view a number of years away.

"Until governments make some attempt to rid themselves of ridiculously high debt levels, it is going to be very difficult to expand.

"The parts of the market and economy that are strong are mining services, infrastructure and on-line technology.

"Investors generally need to look now for yield, and in superfunds, fully franked dividends as these work exceptionally well," Mr Whiting said.

OIL STOCKS CONCERN

On sustainability in energy stocks, Mr Whiting said the current oil prices of around $100/barrel were not likely sustainable.

"The massive shale gas discoveries in the US will be in my view, a game changer for the energy industry and with gas prices so low, the substitution to gas from coal/oil will continue apace, putting downward pressure on prices. This may not happen immediately but over the medium term it is assured of happening.

"What this means for the average investor is to be wary of current inflated prices of many of the oil and gas stocks. It has been a very strong 12 months and as the share market looks 9-12months ahead, I don't expect many of these valuations to stand up in the future."