Does This Miner Earn Their Place?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We’re beginning to see evidence that concerns of a slowdown in China are more than mere rumors. Profits at the world’s largest mining companies fell as they were all affected by weaker pricing for commodities like iron ore, copper and aluminum. To combat China weakness, the mining industry is working overtime to optimize their portfolios.
One of the biggest signs came when BHP Billiton (NYSE: BHP) decided to bury their $20 billion Olympic Dam project for the time being. BHP had until December 15th to make a final investment decision as required under their agreement with the Australian government. They are going to continue to explore less capital intensive ways to move forward on the project but for the time being it’s been shelved.
Not only is BHP shelving this project but they are exploring the sale of several non-core assets. Just recently they announced that they were selling their Yeelirrie uranium deposit in Western Australia to Cameco (NYSE: CCJ) for $430 million. The Fukushima nuclear disaster in Japan and the worldwide slowdown in development of nuclear power has given miners like BHP reason to pause. Cameco on the other hand, already the world’s largest publically traded uranium producer, continues to snap up uranium related assets as they are taking advantage of current market conditions to bulk up.
Another non-core asset on the block is their diamond mining business. They are rumored to be in talks with Harry Winston (NYSE: DDC) as the sole remaining bidder for the asset. Talks apparently are complicated by the fact that rival Rio Tinto (NYSE: RIO) is looking to either sell or float their own diamond business. Why this complicates things is due to Harry Winston's 40% stake in one of the mines and right of first refusal on the remaining 60%. They don’t have the financial capacity to pursue both deals so it will be interesting to see how it all plays out.
All this portfolio shuffling aside, BHP didn’t do much to help their results with net operating cash flow down 19%. On top of this, BHP also announced that they were writing down $2.8 billion dollars on their U.S shale business and nearly half a billion dollars on their Australian nickel division. It would seem that BHP investors have a long road ahead of them.
Appearances however can be deceiving. BHP continues to deliver strong operational and financial results. While pausing the Olympic Dam and looking to divest some diamond and uranium assets would seem to be a red flag for future returns, think again. Consider instead that this is just part of their disciplined long term investment philosophy as part of their commitment to simplify their portfolio and maximize their returns. BHP firmly believes that assets must earn their right to remain in the portfolio.
BHP has twenty major projects that will deliver first production in the next three years. Most of these projects are low risk, high return expansions of existing operations. They are expanding production in iron ore, metallurgical coal, and US shale NGL’s in addition to a major potash project in Canada.
I continue to like BHP best and think that their current portfolio reshuffling is the right long term move for the company.
latimerburned owns shares of BHP Billiton Limited (ADR). The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.