The hot and steamy contact between Glencore and Xstrata is sending a frisson of excitement through the global mining sector. But their $90bn mooted merger hardly heralds a wave of mining deals. Most upstream miners have other priorities. BHP Billiton, for example, which released half-year results on Wednesday and is the world’s largest miner by most measures, has clearly moved on from mega-deals. Its $27bn worth of acquisitions in 2011 accounted for just 4 per cent of all deals in the mining, energy, oil and gas sectors, Dealogic data show. Although always keeping an eye out for tier-one, long-life, low-cost assets, BHP has shifted its focus to $80bn of investment over the next five years in projects in coal, copper and iron ore. BHP’s 5.5 per cent slide in net profit to $9.9bn in the half-year to December is its first profit decline since 2009. But its investment case remains intact. Certainly it was caught by lower metals prices. And production at its Australian coal unit has been hit by floods and strikes. BHP also faced strikes at Escondida, its Chilean copper mine.
BHP can hold off drilling for shale gas for now, while prices are against it. But the miner achieved record iron ore production in the Pilbara region in the first half, boosting earnings at the unit, the group’s top contributor, by more than a third. Profits from petroleum were up by a similar amount. Critically, BHP’s net operating cash flow, at $12.3bn, funds capital expenditure for now.
But given the weakness in developed markets and a high for BHP gearing of 25 per cent (post Petrohawk Energy), the miner is wise to try to live within its means, scaling back or exiting operations (such as diamonds in Canada) that are too capital intensive. That said, BHP still has more growth options than its valuation – 9 times forward earnings, a 17 per cent discount to merger-hooked Glencore – suggests.
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