BHP Billiton: Winner Of Australia's Carbon Tax Repeal

Jul.23.14 | About: BHP Billiton (BHP)


BHP stands to gain about $77 million per year from the repeal of the Australian carbon tax worth about a total of $7 billion.

It is not a significant sum, given the size of company.

The impact on the company depends very much on what it decides to do with the money.

Before I begin my coverage of the benefits to BHP Billiton (NYSE:BHP) of the Australian carbon tax repeal, I want to disclose my personal bias on the greenhouse emissions issue. I do believe that something needs to be done about limiting the growth in the concentration of greenhouse gases in the air. I also believe, however, that given the global nature of this problem, a unilateral self-sacrificing approach is not only self-harming but also ineffective. I therefore believe that there is no harm done to the environment due to Australia's decision to scrap the tax. The only damage done is to Australia's budget balance, given that it will lead to an almost $7 billion hole per year going forward, but I believe the benefits will more than make up for it.

There is an indisputable net benefit to Australia's economy to scrapping this law. While it is true that there is a $7 billion hole in the government's budget to deal with, it is also true that putting this money back into the economy will help offset a portion of the revenue loss by stimulating growth, which will increase the government's revenues. There is also a benefit to the average person, because household utility bills should decline by somewhere between $80 and $550 per year as a result of lower energy prices (link).

Now that I have addressed my own view on the larger picture in regards to Australia's move to repeal the carbon tax, we can focus on BHP as a net benefactor of the tax repeal. This means about $77 million to BHP's bottom line each year (link). Given the size of the company and its yearly revenue, it may not sound like much. In its second half of 2013, profit attributable to it was $8 billion, revenue was $34 billion and current market cap is about $116 billion (link). Within this context, $77 million may sound like just a drop in the bucket. If we think about it carefully, however, it will potentially add way more value to the company than that $77 million per year would suggest, especially if BHP puts that money to good use.

JPMorgan estimates that this move should boost the stock of BHP by as much as 6% (link). There is no mention of the timeline for this effect to happen. I personally like to judge companies by their longer-term potential, therefore, I want to point out the possibilities of this money helping BHP stock and the company overall in terms of the next decade or two. $77 million per year saved over a decade means that BHP has an extra $770 million at its disposal to invest the way it sees fit in order to improve the company. Depending on what it chooses to invest on, the effect on its stock could be more than 6% over this period, or maybe less.

If BHP decides to simply increase dividends by an amount equal to $77 million per year, it will have a positive effect on its stock, but it will be perhaps the least positive of all other initiatives, aside from perhaps using the money to increase the compensation of its upper management. The effect on its stock as a result of allocating this money to dividends cannot be very large, because BHP is already committed to paying over $6 billion per year in dividends (link). The increase per share would not be noticeable.

By far the best possible investment for this new-found income would be to channel it into a technological modernization fund. I am by no means suggesting that BHP is not already actively engaged in improving the efficiency and cost-effectiveness of its capital. In fact, BHP has been working on reducing its energy use and the emissions level with it for many years now, which not only plays well with the public, which is increasingly aware of environmental issues, but also plays well with the bottom line, given the money saved by using less energy. BHP has spent $430 million on increasing energy efficiency in the 2008-2012 period (link). That comes out to about $86 million per year. The energy intensity of its operations has been declining, as a result, at a rate of roughly 2% per year, according to its own estimates.

Adding $77 million per year it will now save by no longer having to pay for the carbon tax will almost double its commitment to modernization and increased efficiency. In the long run, such an investment could make BHP a very competitive company in the commodities field, helping to preserve its position as the largest mining company by market cap (link). I believe BHP already holds an edge in competitiveness, due to its very diverse nature. It extracts everything from base metals to energy-related minerals such as uranium, coal, oil and gas. Metal prices, such as copper and aluminum, can be hit very hard in the event of a recession. Tightness in the energy market can also lead to price spikes, especially during years of stronger global growth. Commodity prices have a trend of volatility, historically speaking. That, in turn, can hurt the bottom line of mining companies. The diverse mix of commodities BHP produces can shield it from price declines in some minerals, and at the same time, shield it from price spikes in energy, which has become a major concern since the beginning of this century due to the spectacular rise in oil prices, as well as other energy sources, such as gas, coal and uranium. The fact that it also produces these commodities is a hedge to its energy cost related to mining other minerals. If it were to also manage to create a widening gap in technological efficiency compared to its main mining competitors such as Rio Tinto (NYSE:RIO), in most of these commodity extraction fields, it can further increase the company's resilience and value.

It remains to be seen how BHP will chose to spend this money. I am sure that its management team will look at the best options. While the yearly sum in question may not be huge, if properly deployed, this sum can make a big difference in terms of BHP's long-term competitiveness and resilience. In any case, the Australian decision to scrap the tax can only be considered to be good news for BHP. Just how much of a good thing it will be depends to a large extent on how the company decides to spend the money.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.