The Rising Influence of Rising Affluence

[DewDiligence]

BHP Reports Strong FY2010 Earnings, Vows Restraint on Potash

[Almost lost amid the attention to BHP’s hostile offer for POT is that BHP just reported impressive numbers for the fiscal year ending 6/30/10. What other company of comparable size has produced growth every year and has an operating margin of more than 40%? BHP’s complete FY2010 earnings report is at http://www.bhp.com/bbContentRepository/docs/100825bhpBillitonResultsYearEnded30June2010.pdf .]

http://online.wsj.com/article/SB10001424052748703632304575450764095380310.html

›AUGUST 26, 2010
By JAMES R. HAGERTY

BHP Billiton's chief executive vowed discipline in bidding for giant fertilizer producer Potash Corp. of Saskatchewan Inc., despite rumblings of possible rival offers from China and an outright rejection by Potash Corp. of the $130-a-share proposal.

The comments by CEO Marius Kloppers come as the world's largest miner embarks on a two-week global tour to seek shareholder support for the deal.

BHP, which Wednesday reported a doubling of its full-year earnings and a robust cash reserve, faces market pressure to increase its offer. Some analysts are questioning whether the $38.6 billion takeover bid makes sense and whether the Anglo-Australian miner should use its cash to buy shares and increase its dividend.

Mr. Kloppers on Wednesday defended the takeover attempt as an efficient way to broaden the company's portfolio and said there is no reason to raise BHP's offering price, which Potash Corp. described as "grossly" inadequate.

"There is only one bid on the table today," Mr. Kloppers said.

Mr. Kloppers also disputed suggestions that he is under pressure to complete a deal in light of the failure of BHP's bid to acquire rival mining giant Rio Tinto two years ago. On the contrary, he said, his job would be at risk "if we do an acquisition purely for the sake of doing an acquisition," rather than because it will produce long-term benefits for shareholders.

The South Africa-born Mr. Kloppers described Potash Corp., the world's biggest fertilizer maker, based in Saskatoon, Saskatchewan, as the kind of long-term growth and diversification opportunity that arises infrequently. Now highly dependent on providing iron ore and coal to the steel industry and producing oil and base metals, the mining company would instantly become a major force in fertilizer if the purchase is completed. The company also is pursuing organic growth, Mr. Kloppers said, but "I can't go out tomorrow and deploy $40 billion [to develop fertilizer businesses] because I don't have the human resources to do that."

BHP earned $12.72 billion for the fiscal year ended June 30, compared with the $5.88 billion earned in the previous year when the company had costs related to shutting down a nickel operation, sales of assets and other matters. Stripping out exceptional items, underlying earnings before interest and tax in the latest year totaled $19.72 billion, up 8.3% from $18.21 billion.

Revenue increased 5.2% to $52.8 billion from $50.21 billion. BHP's cash position also improved, swelling 15% to $12.46 billion from last year's $10.83 billion, in spite of $9.8 billion in capital investment and debt reduction.

The company benefited from increased production of iron ore and oil as rapid growth in China and other developing countries fueled demand and as the U.S. and Europe began shaky economic recoveries. But BHP said it "remains cautious on the short-term outlook for the global economy," citing worries about the winding down of stimulus programs in the U.S. and Europe. In China, Mr. Kloppers predicted a "soft" landing to a more sustainable but still rapid growth level.

The spot benchmark price of iron ore, which benefited early in the year from strong demand from steelmakers, began to soften in April amid expectations of lower steel production and slower near-term economic growth. After reaching $186 a metric ton in April, it has fallen to about $145, according to Platts. That is still much higher than 2008 levels, when the spot benchmark price was as low as $55 a metric ton.

Mr. Kloppers said a bid for Potash Corp. is in line with BHP's long-term strategy of diversifying. He also said that he has the cash flow needed to fund the growth of that business, and that population growth and rising wealth in developing countries will translate into increased demand for fertilizer.

One hurdle for BHP is that most of its shareholders know little about potash and the fertilizer business, said Glyn Lawcock, head of resources research at UBS Australia Equities. BHP must persuade them that potash has good long-term earnings prospects, he said, adding that investors are likely to welcome diversification and the stability of Potash Corp.'s homeland, Canada.

Others aren't convinced the deal makes sense. In a report released Monday, Citigroup Global Markets analyst Clarke Wilkins said Potash Corp. is more valuable as a standalone company than it would be inside BHP. The report said Potash Corp. stock has long traded at a premium to that of BHP in terms of the share price as a multiple of earnings per share. The acquisition also could make BHP's earnings choppier, reducing the appeal of its shares, the report said.

Some shareholders are likely to press the company to use its extra cash to make enhanced payouts. "Without the current [bid] on the table, we would be expecting [a] higher dividend payout and/or share buybacks," Credit Suisse analysts said in a research note.‹