Largest Shareholder Trims BHP Billiton Holdings

Mar.30.12 | About: BHP Billiton (BHP)

Wednesday, BlackRock Inc. cut their position in BHP Billiton (BHP) which they hold both as BBL and BHP, the British and Australian versions of the dual listed Anglo-Australian miner. This was the largest holding in their $14 Billion Global mining Fund, a position which made them BHP's largest shareholder. It was an easing of their position to about 6.5 percent of the World Mining Fund, down from about 9 percent to 10 percent before. Catherine Raw who heads the fund for BlackRock said, "For us that's quite a big shift out of BHP". This is a move worth examining, which is what we will do in this article.

I opened my March 20, 2012 Seeking Alpha article on BHP Billiton (BBL) with the below:

The Great One. Often acclaimed the greatest hockey player of all time, Wayne Gretzky excelled in a 20-year professional career. Frequently lauded for his instinct for the game, he would remind others that it was not so much instinct as it was a disciplined approach to the basics of hockey. At an early age, with the help of his father, he learned to "skate to where the puck was going to be". He was awesome on the ice; the records he amassed over his long career are also awesome.

As I continued, I compared BHP Billiton, the world's largest mining company, to that hockey star. BHP is the greatest on when it comes to mining, and is so in many ways. These include,

Reasons to Buy or Hold BHP Billiton

· The largest market cap of any publicly held miner,

· Diversity of products including iron ore, copper, coal, petroleum and aluminum,

· Geographic diversity, in a number of low risk countries, i.e., Australia, US, Canada and Chile,

· Economic power to invest in projects costing billions, unmatched in its industry,

· Predictable performance - high ROE 38 TTM and ROIC 38 TTM and similar for past years,

· Stated dividend policy, to increase dividend annually or at least not cut at cyclical low,

· Current yield of 3.67%, which is $2.20/share at a market price of $60,

· Valuation estimated at $80 to $114 share.

I said in the article that BHP Billiton was a BUY, and I can only say it is an even better buy at 60 or below.

At the end of the article I summarized the reasons why BHP Billiton is a good buy, and the reasons some might wish to hesitate from buying it. I want to focus now on those reasons, as there is now selling pressure, and discuss how this can work to the advantage of the investor.

Reasons to Hesitate in Buying BHP Billiton

· You believe that economic growth in the world is slowing, and the recovery is failing

· Environmental risks and sovereign risks in the form of taxes are too limiting for miners

· The high beta of the stock makes it too volatile for you

· A long holding period, perhaps 5 years, might be necessary to get the best return

One of the things, which make mining so different from other endeavors, is the cost of its assets and the longevity of these assets. In this case, I am not talking about the cost of earth moving equipment with 12 foot tall tires, huge and powerful draglines or trucks. While expensive, those are just toys compared to the cost to develop natural resources into productive mines. In October of 2009, BHP competitor Rio Tinto (RIO) and Ivanhoe Mines (IVN) signed an agreement with the government of Mongolia to develop a copper resource in the Gobi Desert. The copper mine at Oyu Tolgoi was 54% complete at the end of Q3'11 with a cost to that date of $3 Billion. Commercial production is scheduled to start in the first half of 2013, however, the good news is that there are 81 billion pounds of copper under the surface and 46 million ounces of gold. The mine has a planned life of 60 years which may be a conservative estimate.

Olympic Dam

In the case of BHP Billiton, a huge project is underway at a location known as Olympic Dam. This is an overview.

Located 560 km north of Adelaide, South Australia, Olympic Dam is a multi-mineral ore body. It is the world's fourth largest copper and gold deposit and the largest known uranium deposit. It also contains significant quantities of silver.

At Olympic Dam, BHP Billiton mines, processes, smelts and refines ore to final products. In recent years, annual copper production has averaged about 180,000 tonnes, with 4,000 tonnes of uranium oxide, 80,000 ounces of gold and 800,000 ounces of silver.

BHP Billiton is seeking the approval of the Australian, South Australian and Northern Territory governments for a significant expansion of its existing mining and processing operation at Olympic Dam.

The proposed expansion centers on the creation of a new open-pit mine that would operate simultaneously with the existing underground mine. The proposed expansion would be a progressive development, requiring construction activity over several stages. The project schedule ultimately will depend on the timing and nature of government approvals and the final investment decision of the BHP Billiton Board.

BHP, has yet to make a final decision on the expansion of the Olympic Dam uranium-copper-gold mine at an estimated cost of $27.4 billion. Its largest shareholder, BlackRock, Inc. is not happy with the possibility. BlackRock holds about 5.7% of the miner in its $14 billion World Mining Fund. Yesterday, it trimmed holdings in BHP Billiton Ltd., after expressing concerns that the company's Olympic Dam project and recent shale gas purchases may curb returns. Catherine Raw, who heads the BlackRock fund said yesterday,

Some of the decisions they are making are very good in terms of long term strategy but are you going to make money from it in the next three years, which is our investment horizon?" Raw, a fund manager at BlackRock, said yesterday in Hong Kong. "I struggle to understand how they are going to do that.

Well, of course, no major mining project started today is going to produce any returns in the next three years. I also would suggest that Ms. Raw is well aware of that. She is a Portfolio Manager with BlackRock, a CFA, and is well versed in the mining industry. She has experience working for two miners, at least one of them at the mine level as a geological assistant working underground. She holds two degrees in the field, an MA degree, with honors, in Natural Sciences from Downing College, Cambridge University, and an MSc degree in Mineral Project Appraisal from Imperial College, London.

I see BHP doing exactly as it has done before and acting completely within its stated strategy. BHP Billiton's CEO, Martius Kloppers said in February, "We are going to continue to invest through the cycle," The company will continue to "live within our means, which means we are only going to invest the cash flow that we generate out of our base assets over time." Ms. Raw also has a concern about BHP Billiton's recent purchase of shale gas resources in 2011, buying Petrohawk Energy Corp. of the U.S. and assets from Chesapeake Energy Corp. totaling $16.9 Billion.

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I understand her concern, but again, this is consistent with BHP's continuing policy of product and geographical diversification. Consider its energy portfolio. BHP now has significant resources in both oil and gas, in heating coal as well as coking coal and in uranium. I recall a quote, which I believe, is attributed to Warren Buffett, "Cyclicals look cheap when they are expensive, and look very expensive when they are cheap". Indeed, natural gas resources do not appear to have a high valuation in today's market. That, I suggest, is exactly the time for a long-term value investor to buy them. However, in the Wall Street world of investment banking and money management three years is an eternity.

Today's Market, Longer Term Results
Today, Thursday March 29, 2012 BHP Billiton trading as BBL opened lower today and fell to 59.15 before rising and closing at 60.46, up 0.39, that's a close up 0.65% with a range of about 2.38% considering the high of 60.58. The Australiian version, BHP, closed at 71.39, up 0.62. Here is BHP Billiton's trading as BBL this week and below the four day chart, performance versus the S&P 500 over the last 10 years.

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I remain comfortable with my remark that, "A long holding period, perhaps 5 years, might be necessary to get the best return". I suggest that you give this consideration as Ms. Raw has, who comes to the revelation that investing in a 60 or 100-year asset might have a delayed return, that is, longer than three years. I also suggest that you go back to the original article and look at the ROE and ROIC of BHP for each of the past 5 years. It appears that they know what they are doing, and are doing it well. Being diversified among products and locations also serves them well, and continuing that diversification is the expected strategy.

While I am a firm believer that a picture is worth 1,000 words, let us take a look at the quantitative data for the last 10 years using F.A.S.T. Graphs software.

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The key things which I see here are a ROR of over 20%, over the period, and an increasing dividend which is consistent with what is now a stated dividend policy of growing dividends.

Other Opportunities to Profit

A stock with a high volatility, in this case a 36-month beta of 1.90, can be an opportunity for the trader. Swings of 3% in a day are common, and I do not doubt there are people at computers all over the world who are day-trading and short term trading BHP. Today the swing from low to high was nearly 2.4%. For those who discern downward trends in the stock there can be money made by shorting it. When I was buying it at 68, which is the cost of some of my shares, I perhaps should have been selling it. With good timing, I could have made a profit of 12% in a few months. For the more adventurous, there are leveraged opportunities with options.

Optimism for the Future

Like Wayne Gretzky, BHP Billiton is "skating to where the puck is going to be". When we watch a skilled hockey player weaving between the opponents and getting in position, it is difficult to see the forthcoming results. Based on this player's record, I am confident that goals will be made.

Disclosure: I am long BBL, RIO, IVN.