Replies to post #1741 on The Rising Influence of Rising Affluence

[DewDiligence]

Could WLT Be BHP’s Plan B?

[The premise of this piece could also apply to a buyout of CLF, which has a major presence in North American met coal although it is primarily an iron-ore company (#msg-56398409).]

http://blogs.wsj.com/source/2010/11/10/bhp-should-implement-plan-b-for-acquisitions

›November 10, 2010, 1:41 PM GMT
By Edward Tan

Now that BHP Billiton’s bid for Canada’s Potash Corp. is a long shot, the Anglo-Australian miner would be better off looking for smaller deals that strengthen its core business.

One place to start is growing its metallurgical coal (met coal) presence in the Americas. A sizable acquisition target in that sector is Walter Energy, one of the purest metallurgical coal producers in the United States.

Walter’s high-quality coal makes it ideal for use by steel mills around the world, especially for those in Europe and Brazil. What’s more Walter is in the midst of searching for a chief executive, allowing the company’s board of directors to set personalities aside and focus on the merits of a transaction.

It takes about 34 days for Australian miners to ship met coal to buyers in Europe. The transit from Walter’s mines would take one-third of that time. Indeed, the U.S.’s 46 million ton capacity of met coal is only a third of what’s available in Australia, but it’s cost effective to ship from the U.S. to Brazil where coking coal demand is expected to reach 40 million tons in five years.

While Walter’s enterprise value of $5 billion would hardly dent BHP’s $12.5 billion cash hoard, Walter does have ongoing capex needs of $125 million; but its acquisition would offer a further launching pad for BHP to make other met coal acquisitions in the Americas.

With the completion of its Mine No. 7 capex, Walter has the largest met coal mine in North America, capable of producing 9.5 million tons by 2012 compared with about 7.5 million tons in 2010. Like Potash Corp., Walter is an operating company with a well-established production profile and marketing outlets. Walter’s low leverage — total debt to Ebitda hovers around 0.5 — gives it plenty of room to lever up. Preserving BHP’s “A” rating should not be a problem at all.

Strategic fit aside, Walter also fits the necessary financial profile. It sold 1.9 million tones of coking coal in the third quarter at average prices 70% higher than last year. The company generated free cash flow of $400 million on a trailing-12-month basis. That’s certainly worth more to BHP than storing its stash of cash at current low interest rates.

According to Capital IQ, Walter’s valuation — $5 billion enterprise value and 8.63 EV/Ebitda (trailing 12 months) — is also cheaper than some other U.S. coal miners such as Alpha Natural Resources, Arch Coal, CONSOL Energy Inc. and Massey Energy.

Given the longevity of Walter’s coal mines (18-20-year lives) and the versatility of its coal for both making steel and generating electricity for utilities, Walter would be a relatively low-maintenance acquisition for BHP.‹

[DewDiligence]

BHP’s Oil & Gas Assets



Source: BHP’s May 2010 webcast slides.

[DewDiligence]

BBL* (76.10) reached the highest share price today in 2.5 years, close to the all-time high of 78.34 set at the peak of the bull market in Oct 2007.

*BBL is the best way to invest in the dual-listed company, BHP Billiton.

[DewDiligence]

BHP’s Marius Kloppers was highly ranked in Barron’s annual
ranking of CEOs. See #msg-56504839 for additional color.

http://online.barrons.com/article/SB50001424052970203296504576223573436157008.html

Kloppers has exactly what the developing world needs—a gargantuan supply of raw materials. His Australian-based company is the biggest miner on earth, with operations in 25 countries. Billiton churns out iron ore, coal, lead, zinc, copper and even diamonds, adding up to a market value of $235 billion.

Kloppers, a 48-year-old native of South Africa, takes a cerebral approach to the job. After earning a doctoral degree in engineering and an MBA, he put in a stint with McKinsey and then in 1993 went to work for Billiton's predecessor.

While his recent attempts at mega-mergers have been unsuccessful, including last year's $39 billion bid for Canada's Potash, Kloppers has continued to expand the company with smaller acquisitions, including the recent addition of nearly $5 billion in U.S. natural gas assets.

Look for him to keep mining for big acquisition candidates: Billiton has a cash hoard of $16 billion [but most of it has now been committed to cap-ex and share buybacks: #msg-61382100].

[DewDiligence]

Was BHP Smart to Bet $20B on Gas Fracking?

[The author of this piece from Forbes presents the bull and bear cases, but seems inclined to give BHP the benefit of the doubt. BHP’s CEO, Marius Kloppers, defended the decision staunchly on today’s FY1H12 CC, saying that BHP can make money on these projects over the long haul where smaller companies cannot. Comments?

See #msg-56504839 and #msg-61402484 for related stories on Kloppers.]

http://www.forbes.com/sites/christopherhelman/2012/02/08/shale-game-was-bhp-billiton-smart-to-bet-20-billion-on-gas-fracking

›2/08/2012 @ 6:05PM
By Christopher Helman

BHP Billiton Chief Marius Kloppers just placed a $20 billion bet on U.S. natural gas. That’s pretty risky, even for him.

At the start of last year Marius Kloppers had $10 billion burning a hole in his pocket. Rebuffed in attempts to acquire mining rival Rio Tinto as well as Potash Corp. of Saskatchewan, the chief executive of BHP Billiton needed a big deal to deploy the $24 billion in profits the company had piled up last year feeding China’s insatiable appetite for natural resources.

He found it in Arkansas, shelling out $4.75 billion to acquire gas giant Chesapeake Energy’s acreage in the Fayetteville Shale. Then in July he bet again, paying $15 billion—a 65% premium to market value—for Petrohawk Energy and its accumulation of prime shale fields in Louisiana and Texas [#msg-65211152, #msg-60162987] Though BHP had zero experience drilling for shale gas, the deals suddenly made the world’s largest and richest mining company, headquartered in Melbourne, Australia, one of the 15 largest natural gas producers in America. Even for Kloppers, who’s a 19-year veteran of BHP Billiton and known for his steeliness in building one of the most powerful commodities companies of the past half-century, it all looks risky—maybe too risky

Evy Hambro, manager of a $30 billion mining fund at BlackRock, wondered aloud last fall what BHP had gotten his clients into. “We are waiting to be educated by BHP on these transactions,” Hambro said at a Melbourne conference in October. “When you start putting something on your stall that you’ve never told investors about, people are naturally a bit reserved. So when you are suddenly exposed to shale gas, you want to know why.”

For one thing, BHP Billiton Petroleum, the oil-and-gas subsidiary, has focused mostly on deepwater projects; it hadn’t “fracked” a single shale well until it took over the operations of Chesapeake. Meanwhile, the U.S. nat-gas glut shows no signs of abating. The price of domestic gas already appeared to be at a nadir at $4.25 per thousand cubic feet (mcf ) when the Petrohawk deal was cut. Yet in the intervening months prices fell to $2.30 per mcf in early February, a depth not seen since 2002 and so low that drillers are losing money on marginal shale fields. Shares of big gas drillers have fallen, and in January gas giants Chesapeake Energy and ConocoPhillips both announced they would curtail gas development to pare losses.

As if that weren’t enough for shareholders to worry about, the $20 billion shale outlay is just an ante. Michael Yeager, the Houston-based chief executive of BHP Billiton Petroleum, says it will take ten years and at least $50 billion in capital investment to develop these assets. By comparison, Rio Tinto and Potash Corp. are already mature companies that throw off loads of cash.

Kloppers shrugs off the Cassandras. “Shale gas is like coal mining,” he says. “Like coal the formation is extensive, and you can programmatically and at lowest cost move through the basin and extract the gas.” Besides, it has held on to most of Petrohawk’s 800 employees and many key engineers.

Yeager admits that for the average well in the Fayetteville and Haynesville shales BHP needs gas prices of $3 and $4 per mcf just to break even. Yet, he says, Petrohawk had laid claim to the thickest, juiciest acres in those plays, where the economics are slightly better. What’s more, in the oil-rich Eagle Ford and Permian Basin acreage, BHP can give away the gas and still make good profits on the oil. [BHP claims that, right off the bat, 20% of its US shale production will be liquids.]

The executives believe that in time demand will follow supply. “Shale is a game changer; it’s real, it’s abundant, it’s economic,” says Yeager, a former Marine who spent 26 years at Exxon. “On a global basis it is cheap molecules.” Eventually “the U.S. will connect cars to natural gas,” says Kloppers. And if that’s not enough to raise the gas price, there are exports. [There is also the likelihood of increasing demand for US NG feedstock by chemicals companies (including the chemicals units of integrated oil companies such as Shell).] A handful of liquefied natural gas export terminals are already in the works on the U.S. Gulf Coast. Considering that LNG fetches $15 per mcf in Asia and $10 per mcf in Europe, “putting a price marker down for export gas is an important thing,” says Kloppers. He’s convinced that natural gas, like oil, will someday fetch pretty much the same price all over the world. “We are confident, based on all the other products we’ve got, that the arbitrage will continue,” says Kloppers.

He should know. Kloppers, 49, joined Billiton back in 1993. He leapt up the ranks, and at the time of Billiton’s merger with BHP in 2001 the wunderkind was appointed chief marketing officer—responsible for matching his supply with customer demand on a myriad of minerals. In 2005 he spearheaded BHP Billiton’s $7 billion acquisition of Australia’s Western Mining Co. (which owned BHP’s new Olympic Dam megaproject).

When he was appointed CEO of BHP Billiton in 2007 the global mining business had never been better, as booming demand in China, where BHP sells 30% of its products, fattened bottom lines across the industry. Kloppers waited less than a month to launch an $80 billion takeover bid for rival Rio Tinto. It was a bold move that would have resulted in one of the world’s ten biggest companies. The deal made sense, too: As with BHP Billiton, Rio’s assets (Alcan acquisition aside) are high quality, long-lived and low cost. Yet the betrothal ultimately foundered in the wake of the global financial crisis.

Kloppers is not afraid of challenge or change [no kidding]. He grew up in Johannesburg, during the apartheid era. He was conscripted into South Africa’s war with Angola at age 18, went to the University of Pretoria, won a Fulbright scholarship, earned a doctorate at MIT and an M.B.A. at Insead, and worked as a consultant at McKinsey & Co. before joining Billiton. Married to his high school sweetheart, with three kids, including an adopted Zulu daughter, Kloppers is a family man. He’s also a sophisticate, a prodigious reader and a lover of avant-garde cinema who doesn’t suffer fools.

Kloppers brushed off the Rio Tinto deal and in 2010 set his sights on the new target—Potash Corp. of Saskatchewan. The hostile $30 billion bid was ultimately blocked by the Canadian government, which was unwilling to see control of possibly the world’s biggest potash reserves fall into foreign hands. No matter, Kloppers is taking the fight to Potash Corp. Having grabbed some undeveloped Canadian potash reserves, BHP is likely to invest $10 billion in its new Jansen mine.

Kloppers has fully rationalized the benefits of plunging BHP into shale gas. He speaks professorially of the sweep of civilizations and how BHP is set to supply their needs at every step of development. “As economies grow they consume everything in infrastructure: steel, coking coal, manganese. As they continue to industrialize they need copper and nickel, aluminum,” he says. “As you hit $30,000 GDP per person economies consume more energy. They need more oil and gas.”

The average Indian or Chinese is far from that, but give it a decade or two. Because BHP Billiton’s time horizon is closer to 30 years than 3 months, Yeager says, he has no problem swallowing several quarters of losses on certain shale fields. “We want to become masterful at working shale. Not only here, but on a global basis.” To that end he suspects the controversy over fracking will be short-lived. “The industry is doing a great job of taking frack fluids and making them more benign and more safe,” Yeager says, and BHP is dedicated to investigating “greener” fracking techniques.

BHP also has a good reputation for safety and was the first allowed to drill in the deepwater Gulf of Mexico after the BP oil spill. With BP, BHP is set to start the next phase of development on its 4-billion-barrel Mad Dog field. Yeager predicts BHP’s oil and gas volumes will grow from 600,000 bpd now to 1 million bpd in 2015.

And if natural gas gets even cheaper? That would give BHP only more opportunities to pick off weaklings, it says. With their decades-long view, Kloppers and Yeager don’t doubt in the least that world demand for gas, as a cleaner-burning fuel to supplant coal and oil, will grow. “Shale is going to work around the world, and it’s going to be here for 50 years,” says Yeager. “Wouldn’t it be irresponsible to not be in that?”‹

[DewDiligence]

BHP’s CEO, Marius Kloppers, is “retiring”:

http://online.wsj.com/article/SB10001424127887324449104578314553299771428.html

Although BHP said in November it was looking for a replacement for Mr. Kloppers, who has been its CEO since 2007, the change was sooner than many in the industry expected. South Africa-born Mr. Kloppers has been criticized for failed acquisitions attempts, including a bid for rival Rio Tinto PLC, and hefty write-downs including U.S. shale gas and Australian nickel assets.

Inasmuch as Kloppers is only 50 and the incoming CEO is 56, I’d say it’s reasonable to surmise that this was a firing.

The announcement on the CEO change was made in conjunction with BHP’s FY1H13 financial results.

BHP’s shale-gas acquisitions—and write-offs—were discussed on this board in #msg-78203053.