BHP rallies on record dividends as company says goodbye to London

The London Stock Exchange’s largest company plans to exit fossil fuels and move its primary listing to Australia.
The group reported a record $15bn (R223bn) dividend payout for the year. Image: Carla Gottgens/Bloomberg

BHP shares rallied 7.4% on Tuesday following the announcement of an 88% leap in underlying profit to $17.1 billion, and a jump of 151% in dividends per share to $3.01.

The jump in share price appears to be a response to good financial results as well as news that the group would shift its primary listing from London to Sydney, and would merge its petroleum business with Woodside to create a global top 10 independent energy company – effectively signalling BHP’s exit from oil and gas to cleaner commodities.

In what was regarded as the most radical slate of announcements from the company in nearly a decade, BHP also announced the investment of $5.7 billion in the Jansen potash mine in Saskatchewan, Canada.

The decision was influenced by rising potash prices, driven by demand from the agricultural sector. Potash prices are up between 150% and 180% over the last year, depending on the grade, a trend that is likely to benefit in future from mega-trends such as rising population, changing diets and the intensification of agriculture.

BHP and Woodside plan to merge their respective oil and gas portfolios, subject to due diligence, and if successful, the enlarged group would be owned 52% and 48% by existing Woodside and BHP shareholders, and would remain listed on the Australian Stock Exchange.

“The Jansen project offers significant high returning growth optionality in the world’s best potash basin and an attractive investment jurisdiction,” says BHP in its 2021 results announcement.

Activist advice

It appears that BHP has heeded some of the advice of activist investor Elliott Advisors, which has been urging BHP since 2017 to unify its share listings and take other steps needed to unlock $22 billion (R325 billion) in value and improve capital returns.

The first step recommended by Elliott was to unify BHP’s dual-listed company structure into a single Australian-headquartered and Australian tax resident listed company.

Elliott also recommended hiving off BHP’s US petroleum business and listing it on the New York Stock Exchange. The continued inclusion of this in the portfolio obscured the group’s true value.

The demerger of South32 from BHP in 2015 was a step in the right direction, according to Elliott, but the inefficiencies of maintaining a dual listing in London and Australia prevented the group from delivering optimal shareholder value.

BHP shares in London traditionally trade at a discount to the Sydney-listed shares because of lower taxes on dividends in Australia.

Unification process

The unification proposal must be approved by 75% of shareholders, which should be easily achieved given the already visible unlocking of value taking place this week.

The Financial Times reports that existing listing rules in London mean BHP will be removed from the exchange’s blue chip index, and that will prompt many UK shareholders to sell.

BHP CEO Mike Henry told analysts that the costs of unification of the group’s share listings had reduced following the settlement of a tax dispute in Australia.

The one-off costs of unification are likely to be $400-$500 million.

The numbers

Copper production was down 5% to 1.636 kt (thousands of tonnes), in large part due to Covid-related lockdowns in Chile. Total iron ore production increased by 2% to 254 Mt (millions of tonnes). Production of between 249 and 259 Mt is expected in the 2022 financial year. Coal production for the year was down 1% to 41 Mt.

Iron ore’s contribution to Ebitda (earnings before interest, tax, depreciation and amortisation) came to $26.3 billion for the year to June, fattened by a 77% Ebitda margin. Copper contributed $8.5 billion, followed by petroleum ($2.3 billion) and metallurgical coal ($593 million).

The group reported a record $15 billion dividend payout for the year, the latest in a string of bumper earnings announced by miners in recent months. The company used the cash influx to pay down debt by 66% to $4.1 billion.

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Source: BHP 2021 annual results presentation

If shareholders approve the unification of the group’s share listings in Australia, this is likely to be effected in the first half of 2022, with the proposed merger of its petroleum business with Woodside to follow after that.

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