By Rhiannon Hoyle
SYDNEY-- BHP Billiton Ltd. sought to satisfy yield-hungry
investors with the promise of higher returns despite a drop in
fiscal first-half profit, reinforcing a shift among the world's
largest mining companies to give more cash back to investors, as a
decadelong commodities boom fades.
BHP on Tuesday pledged to maintain or increase its dividend even
after a proposed spinofflater this year in which the world's
largest mining company by market value would hive off some unwanted
assets into a separate company called South32, which analysts
estimate would be valued at roughly $15 billion.
Like its peers in the mining sector, BHP has been shelving
expansion projects and cutting capital spending, after a supply
glut emerged in many commodities, including iron ore and oil, two
significant contributors to the company's earnings. But despite a
47% fall in profit in the six months ended Dec. 31 to $4.27
billion, BHP still raised its interim dividend 5% to 62 cents a
share.
"If our shareholders approve the demerger, we do not plan to
rebase or lower this dividend, which implies, all other things
being equal, a higher payout ratio," BHP Chief Executive Andrew
Mackenzie said. "And that's before you consider that South32 will
be set up to deliver additional cash returns through dividends to
their shareholders, which, of course, is all our shareholders at
the moment."
Cautious mining executives are now looking to woo fund managers
with beefed-up payouts instead of promises of endless growth, after
a string of multibillion-dollar write-downs caused by the slump in
commodity prices.
Confidence in mining companies has also been shaken by signs of
moderating resources demand growth from China.
Anglo-Australian mining company Rio Tinto recently said it would
buy back $2 billion of its shares in 2015 and pushed up its annual
dividend 12%, while hinting it could increase future returns.
Last August, Switzerland-based mining company and trader
Glencore PLC announced a $1 billion buyback and raised its dividend
11%. "Growth for growth's sake isn't for us," said Glencore CEO
Ivan Glasenberg, himself a major shareholder.
Some mining companies have raised eyebrows by clinging to
dividends even as their financial results weaken sharply.
Anglo American PLC, the world's fifth-largest diversified mining
company by market value, said this month that it would maintain its
full-year dividend at 85 cents a share, despite recording a $2.51
billion annual loss because of multibillion-dollar write-downs
against its operations.
For sure, mining companies are having to weigh calls from
shareholders for higher cash returns against their desire to
maintain a strong balance sheet. Mr. Mackenzie of BHP has made it
clear he wants to keep what the company calls a "solid A" credit
rating, and has said a share buyback isn't an immediate priority.
The company plans to reduce its capital spending 17% to $12.6
billion in its fiscal year ending in June.
Still, Mr. Mackenzie said he is confident BHP can cut costs and
bolster cash generation after the proposed spinoff. "I think we
have pitched it correctly," he said of BHP's capital-management
plans. Shares in the company, which is listed in the U.K. and
Australia, closed up 2.9% in Sydney. The stock was up 6.2% in
London late Tuesday.
Still, not all investors are enamored by the shift in strategy
among the biggest mining companies. "They are basically feeding the
market what it wants at the moment but, in my view, you are
throwing away capital that could be used for future advancement,"
said Robert Hook, a Melbourne-based fund manager at SG Hiscock
& Co. Mr. Hook sold his holdings in BHP last month.
Some investors say it is difficult to gauge exactly how BHP's
capital-returns program will proceed until there is further clarity
on the shape of the company after the assets separation. BHP is set
to release more details about the spinoff next month.
The assets BHP plans to jettison were among its strongest
performers in the first half. The company's aluminum, manganese and
nickel division, which will form the core of the new South32, has
been benefiting from higher prices and lower costs. The division
more than doubled its earnings before interest, taxes, depreciation
and amortization to $1.07 billion.
Separately on Tuesday, BHP's chief for oil and gas production
said the U.S.'s role as a so-called swing oil producer for the
world isn't likely to last long, with the country's petroleum
growth peaking sometime in the next decade.
"U.S. liquid growth is relatively short-lived," said Tim Cutt,
president of BHP's petroleum and potash division, in a meeting with
reporters in London.
U.S. shale production has contributed to a world-wide collapse
in oil prices, which have been cut in half since June. The U.S. is
now viewed as a swing producer of oil, meaning the world's supplies
go up and down--and potentially drive prices--with the country's
output.
And BHP Billiton Chief Financial Officer Peter Beaven said the
mining giant doesn't have plans to meaningfully expand iron-ore
production, citing concerns about an oversupplied market. "It is
something we are a little cautious on," Mr. Beaven said about iron
ore in a meeting with reporters in London. "This market is
struggling, let's face it."
While demand for the steelmaking ingredient has "been
reasonable" in China, Mr. Beaven said "the bigger issue on iron ore
is of course supply." Still, he said iron ore has been profitable
for BHP in its fiscal first half. BHP says it spent $20.35 a ton to
produce iron ore in the first half, while the average price it
realized was $70 a ton. Still, that was down 38% for the period,
and prices have fallen more since.
Michael Amon in London contributed to this article.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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