Here was Australia’s largest listed non-banking company declaring that it could grow its base value by more than 50 per cent.
There was no time limit placed on the growth but it was nonetheless the sort of statement that normally comes from much smaller listed corporations.
No doubt the pressure from hedge fund giant Elliott played a role in BHP’s optimism.
Nevertheless the way it believes it will achieve that growth has enormous implications for both BHP (BHP) shareholders and the nation. And in terms of the stock market it comes at a time when the four largest corporations on the ASX — the banks — are under pressure from the government and doubts about the housing market. The market is pensive.
The BHP presentation was made by its chief commercial officer, Arnoud Balhuizen. He set out very clearly seven points on how BHP would achieve that 50 per cent growth:
* Further productivity improvements. The company has reduced costs by $11 billion but it believes there is a lot more to come as new technologies are created by the improved economics of mining. In particular, BHP believes it can use techniques developed in each of its different areas to improve overall performance.
* Latent capacity. The company has a series of expansion opportunities based on existing deposits. The two most obvious are the Resolution copper mine the US and Olympic Dam in Australia. Balhuizen says Olympic Dam will generate value for Australia for generations to come but gave no starting date for expansion.
* BHP selects two product commodities which it believes will be enormous contributors to the expected rise in value of the company. The first is US shale oil which the Elliott group wants either to sell or offer to shareholders as a separate enterprise. Balhuizen explained that by forward selling oil it is possible to drill shale wells with a known locked-in commercial return, which recently came in at 30 per cent. BHP is an oil bull, believing that demand will continue to rise but supply will be affected by the maturing of old wells. The second area of BHP optimism is copper where BHP not only has the Olympic Dam and Resolution deposits but the potential to expand in Chile.
* BHP believes that the Belt and Road initiative in China opens up an enormous growth prospects not only for BHP but for all of Australia. It is an enormous set of infrastructure projects which will absorb large amounts of resources and BHP clearly believes that it will be a significant part of the 50 per cent increase in its base value. Australia should embrace the potential.
* The BHP global vision embraces India almost as much as China. It points out that the Modi government plans a 100 per cent electrification by 2020 and housing for all by 2022, which will have a material impact on demand for coal, iron ore, copper and petroleum.
* BHP expects the world’s population to grow by 30 per cent by 2050 and crop demand to grow by 50 per cent. That will create a big demand for potash — hence BHP plans to gradually increase its Canadian potash investment — a move that many institutions oppose.
* And BHP expects to gain further resources by targeted exploration — its traditional way of developing wealth.
Balhuizen believes that the greatest threat to the increase in BHP’s value is a fall in world trade caused by rising protectionism.
Today’s institutions are not that interested in long-term vision and prefer to concentrate on what is likely to happen in the next six to 12 months. But 40 per cent of the shareholder base in BHP’s Australia listed arm is owned by retailer investors. Retail investors in companies like BHP are long-term holders and much less interested in short-term fluctuations. BHP therefore has a platform to market to its retail shareholder base. It has started on the process but there is a need for a lot more to come.
And of course there is a caveat — if BHP is wrong about its long-term growth prospects it will become incredibly damaged.
Arnoud Balhuizen is echoing many of the sentiments that CEO Andrew Mackenzie made in Barcelona last month. They both need to be right.
Investors turn to Asia
Our big banks might have retreated from Asia, but it’s an exciting region for long-term growth.
Franking grab will hit ASX
Labor’s franking credits policy is the first step in giving some pensioners a sharp clip under the ear, but investors will suffer too.
At my table at a Melbourne Mining Club lunch today were several veteran stock brokers. Their eyes almost dropped out of their heads when they heard the BHP presentation.