BHP looks for deals with ‘value created at the bottom of the cycle’
BHP engineered to ‘still have a business not only capable of surviving, but actually of thriving’.
BHP will look to capitalise on markets turmoil to pursue potential deal opportunities as the plunge in oil prices and coronavirus raise the prospect of a prolonged global slump.
The mining giant lost 14 per cent in value on Monday due to its exposure to petroleum markets as plunging oil prices sparked fears of a global recession.
Chairman Ken MacKenzie said the market mayhem could lead to investment opportunities, with BHP owning a strong balance sheet buoyed by years of high commodity prices.
“What we do know is that value is created at the bottom of the cycle,” Mr MacKenzie told a business summit in Sydney on Tuesday. “We have engineered the business so that if the bottom of the cycle goes on for some multiple years that we still have a business not only capable of surviving, but actually of thriving. I’m not sure if there will be any opportunities that come from this, but if there are, we are actually in a position to act.”
BHP chief executive Mike Henry identified copper, nickel and potentially potash as “future-facing” commodities it might consider for deals, while noting they would need to “move the needle” to generate value at scale.
The miner said it had cut net debt to less than $US13bn ($19.7bn) and held cash of more than $US14bn at the end of December.
The oil price collapse could slow BHP’s Trion oil project in the Gulf of Mexico and Scarborough LNG development in Western Australia, according to a Macquarie note, with neither project generating a sufficient return at spot prices and both at risk of delays should the slump extend.
BHP said the oil price hit was not connected to the coronavirus but more about the supply side spat between Saudi and Russia, while noting that less than 15 per cent of its earnings are derived from petroleum.
“Anytime that Saudi Arabia decides to open the spigots, it’s going to have a big impact on oil prices. It’s not the coronavirus that’s driven a 30 per cent reduction in the oil price. It’s the fact that the supply side dynamic is changing,” Mr MacKenzie said.
Trade relationships continue to be tested by events such as Brexit and the fallout between members of OPEC and Russia.
“Trade tensions continue to simmer between the US and China, and as of yesterday between Russia and Saudi Arabia.”
The BHP chairman pointed to strength in both its iron ore and coal businesses with the steelmaking material in particular still holding up at about $US90 a tonne despite disruptions in China.
“Iron ore is very strong and that’s because there are some supply side dislocations and it’s hard for China for example to get their workforce out to their mines on the supply side. But on the demand side because most of the steel mills are on the seaboard they could actually get their workforce back to their steel mills.”
China will be considering stimulus measures to reboot its economy with Australia and the US also weighing similar steps.
“Australia is looking at coming out this week with programs and the US is looking at the same thing. I’d be surprised if they’re aren’t similar discussions with all governments around the world including China. What form and shape that will take I’m not sure.”
BHP shares were trading higher on Tuesday, up 4.1 per cent to $28.70.
