BHP's big hooroo to FTSE 100

Well, BHP (BHP). It’s been good having you here. Yes, you’ll be just round the corner with a standard listing, but losing the biggest presence from the FTSE 100 has been quite the shock, even if you've been itching for a change for some time. 

The world’s largest miner by market capitalisation has decided to get rid of its dual-listed company (DLC) structure, with BHP Group plc listed in the UK and BHP Group Ltd on the Australian Stock Exchange. 

The structure lasted 20 years following the merger between what used to be the Broken Hill Proprietary Company and South African miner Billiton, although came under heavy attack from activist investors Elliott Management in 2017, who called for a simplification resulting in a primary listing in London. BHP ruled it out on a cost basis – Elliott said $400m while the miner said it would be in billions – while moving headquarters to the UK from Melbourne would never have flown. 

Elliott has launched plenty of interventions in recent years – and even the suggestion of one was enough to send SSE’s (SSE) shares up a tenth earlier this month – but the ‘Fixing BHP’ push now looks successful, if slower than Paul Singer and Co. had hoped. 

BHP’s Australian entity is unquestionably the keeper. The company has had to send cash to plc to cover its dividends for years. This is because following the South32 (S32) spin-off, which hived off much of what used to be Billiton, the Ltd company has made most of the profits. In 2021, the Australian iron ore division contributed 80 per cent of the company’s underlying cash profits of $37bn. 

The unification was a “natural flow on” from these changes, chief executive Mike Henry said, adding it would allow deals like the Woodside-BHP Petroleum merger to be “undertaken more simply”. This all-share deal will hand shareholders a stake in the new, larger Woodside Petroleum (Au:WPL). Henry said the “suite of high-return brownfield and greenfield projects” would keep earning cash given the world “will still need oil and gas for decades to come”. 

Henry said this was better done off BHP’s books because it would “accelerate BHP’s relative exposure to future-facing commodities”. The argument over whether companies should sell off assets linked to heavy pollution like those in the petroleum division has matured somewhat this year, as investors come to see the reality of divestments not actually stopping the emissions, just passing stewardship of them on to mostly smaller companies. The spinoff strategy – as done by Anglo American (AAL) with Thungela Resources (TGA) - keeps the assets on public markets but allows investors to make their own choice. 

But this option could still see the less cash-generative assets end up in the hands of smaller players. Andrew Harwood from consultancy Wood Mackenzie said the “inevitable optimisation of enlarged portfolios [would] also provide opportunities for other players looking to squeeze value from assets”. 

At the same time as this multi-billion dollar merger, BHP committed to spending $5.7bn on getting the Jansen potash mine in Canada to production. This was a pet project of former boss Andrew Mackenzie, and the miner had already sunk billions into development. First ore is expected in 2027. 

Massive projects like this are hard to get right (“We haven’t always got everything right with Jansen,” said Henry), as shown by Rio Tinto’s (RIO) Oyu Tolgoi mine in Mongolia or even the Woodsmith fertiliser mine now owned by Anglo American in North Yorkshire. Alongside the green light, BHP cut Jansen’s carrying value by $1.3bn to $3.3bn based on “analysis of recent market perspectives”. But overall the company is hopeful, and Jansen forms part of its “future-facing” strategy, which revolves around iron ore, metallurgical coal, copper, nickel and potash. 

Underneath these eye-catching strategy moves, BHP’s 2021 earnings were also impressive. 

The underlying cash profit figure of $37bn was a two-thirds uptick on last year, while the final dividend of $2 a share takes the total payout for the year to $15bn or $3 a share. This is well above the previous record of $2.35 a share following the sale of its onshore US oil and gas operations in 2019. 

High iron ore prices drove this financial performance, with realised prices of almost $160 a tonne in the six months to 30 June, taking the unit’s underlying cash profit up over 80 per cent to $26bn, even with a 17 per cent hike in unit costs. Copper earnings also surged, almost doubling to $8.5bn. 

Iron ore won't stay up forever, and indeed, the benchmark price has tumbled from over $200 a tonne to $167 a tonne in the past month, but this unification should help the 'Big Australian' weather future downturns through cutting internal costs and getting rid of the Plc discount. Buy. 

Last IC View: Buy, 2,808p, 20 July 2021