Copper-bottomed BHP can now dig into bigger issues

By Clara Ferreira-Marques

SINGAPORE (Reuters Breakingviews) – A copper-bottomed BHP can now dig into some tougher matters. The mining titan has reorganised its portfolio and, as full year results unveiled on Tuesday show, repaired its balance sheet. Cash flows are near record levels last seen seven years ago. That means the board and boss Andrew Mackenzie can turn their attention to pricklier strategic issues including whether to stick with oil, gas and potash.

It has been a rocky ride for the $125 billion company. Business-cycle booms and busts are partly to blame, but bad decisions are, too. Moving into shale energy at the height of the fracking boom was one.

Much of this has been resolved. Most recently, BHP agreed to sell the bulk of its U.S. onshore assets to BP. Debt has more than halved in two years to $10.9 billion, at the bottom end of BHP’s target range. Cost cuts and other improvements lifted EBITDA margins for the year to June 30 to 2011 levels, when mineral prices were substantially higher.

BHP also has followed rivals in handing back more cash. The Australian company booked a record final dividend and confirmed it would return proceeds of its U.S. shale sale. That should help support a healthy valuation of 15 times expected earnings.

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A tidier house and cooler metal prices will prompt fresh questions, though. The first is whether BHP should remain in conventional oil, the smallest and least profitable of its main areas of operation. Exploration successes have been encouraging, but hints that BHP might consider a deal revive concerns over whether the business is an expensive diversion.

The second, thornier, problem is what to do with two giant greenfield assets: Olympic Dam, an Australian mine that has suffered consistent production troubles, and Jansen, a potash initiative whose future is undecided. BHP has a poor track record in such complex projects built from scratch. Bringing in a partner for both would ease some pressure.

That will be easier said than done, especially for Jansen, given the consolidated nature of the industry. Healthy returns of capital should keep BHP investors appeased for now. It won’t be long, though, before they get restless again.

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