Response to BHP Billiton Tactic Is Telling

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Mining shares were like an anchor for the FTSE today, during a period when the last thing the FTSE needs is an anchor. Although it was not the biggest loser of mining sector of the combined 1,034 losers on the LSE, BHP Billiton’s share price (LSE:BLT) fell more than 5.0% to 1,021.50, back the position it held on 25 August. Since that date, it has been a bumpy ride with the stock struggling to stay above 1,100.

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Because of the current volatility of mining stocks (when aren’t they?), it is a bit difficult for anyone not able to read the minds of all BHP investors to determine precisely what caused today’s downturn. The announcement the company released this morning was a contributing factor, but I would warn against it being cited as the ONLY factor. In fact, I might go so far as to say that it should not have been a factor at all, unless its impact was keep the share price from falling any further.

The Big Announcement

The first sentence adequate sums up the potential tactic that BHP is considering. “It will undertake a global debt investor marketing effort across Europe, Asia and the United States commencing 28 September 2015.”

The Big Component

The component of the tactic is that, “it may … consider the issuance of multi-currency hybrid capital instruments to institutional debt investors,” subject to market conditions. That contemplation, which is all that it is at this point, is spurred by the combination of low interest rates and the increasing affinity of global debt investors for hybrid capital.

The Big Reasons

I see three fundamental reasons for considering issuing hybrid capital securities.

  • To maintain a 50:50 (or 0.50) ratio of the company’s debt to equity (BHP’s current ratio is 0.58).
  • To continue the company’s commitment to a progressive shareholder dividend. To this point, CEO Andrew Mackenzie made it clear that, “Our commitment to our progressive dividend is resolute, and this means that in every half-year reporting period, we aim to maintain or grow our dividend per share. This is a commitment which has withstood many previous cycles, and is and remains a key differentiator relative to our peers. It is testimony to the quality and diversity of our assets, and to the distinctive operational excellence and capability of our people.”
  • To continue with a growth strategy that has been achieving the desired objectives. Just because a company is having a difficult year, does not necessarily mean that it is performing badly. The short term is almost always near-sighted. BHP seems to understand how the road ahead is likely to be paved – and I don’t mean “paved with good intentions.” Mackenzie clarified that by stating that, “Our productivity drive has generated strong cash flow; it has funded the dividend [and] reduced the net debt, and we continue to invest in everything we said we would do, in growth.”

A Big Factor

It remains to be seen if BHP will make the move to market hybrids. However, if they do, we know one very important thing that every shareholder must understand. The company is NOT considering issuing any convertible instruments, the kind of hybrid debt that tends to first come to mind. That is very good news. No dilution of shares. No redistribution of ownership. If investors are afraid, it is because they are afraid of the unknown and the unknowable. What I am trying to say is that it looks like the company is trying to put investors at ease, not frighten them.

It all makes sense to me, especially of keep BHP stable through the storms.

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