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Back to the future: BHP Billiton

Origins of the World’s biggest mining group trace back more than 130 years to Indonesia – Hanré Rossouw, Investec Asset Management.

HANNA BARRY: The SAFM Market Update with Moneyweb and Investec Asset Management will, starting today, we’re bringing you a weekly business and investment series in which we highlight a prominent company in the series entitled Back to the Future. We focus on the history, business development and investment potential of a particular company.

Today the focus is on the Anglo-Australian resources company BHP Billiton. On the line is Hanré Rossouw, portfolio manager at Investec Asset Management. Hanré it’s good to have you with us and welcome.

HANRÉ ROSSOUW: Good day and thank you very much.

HANNA BARRY: Now BHP Billiton has a market capitalisation of some R484bn. It’s one of the largest stocks on the JSE today, but its origins trace back as far as I understand, more than 130 years to Indonesia. Tell us a bit about that.

HANRÉ ROSSOUW: That’s right, so the BHP Billiton that we know today really came from a merger in 2001 between the South African group Billiton and the Australian group BHP and therefore the name of BHP Billiton of course. But the Billiton company itself, you’re right that the name is traced back to the Billiton Island in Dutch Indonesia where they started mining tin in 1851. The GenCorp company which is really the origins of Billiton came to force in the 1800s and actually developed into a consolidation of the South African assets. And interestingly enough Harry Oppenheimer was quite involved in creating and empowering a few Afrikaans business interests into this GenCorp group to consolidate a lot of the smaller mining assets in South Africa and was effectively an Afrikaans empowerment at the time.

Quite interesting that Derek Keyes who was later the finance minister, was instrumental in consolidating these assets and then a gentleman called Brian Gilbertson bought the Billiton assets from Royal Dutch Shell at the time and consolidated the GenCorp group into – renamed Billiton then. Listed in London in 1997 and then merged with BHP in 2001. So quite a strong South African heritage in this group and of course Marius Kloppers, a South African also ran the company from 2007 to 2013 and he was quite instrumental in focusing that group and improving the quality of the assets, so we could be quite proud as South Africans of the influence we’ve had on what is today the world’s biggest mining group.

HANNA BARRY: Absolutely amazing when you take a look at history, take a look back. You mentioned it’s the world’s biggest mining group today, of course started mining tin in 1851. Today it mines all kinds of things. But it is under pressure like all resource stocks, all resource companies. Yet investors still do like the share, they like the company, they like the management, what is your reading of where BHP Billiton is today?

HANRÉ ROSSOUW: I think critically for me the success of BHP Billiton from a very diversified asset base, I think one has to recognise that in the commodities industry you’re looking at something that’s quite cyclical in nature and that’s where BHP Billiton really stands out. Diversified assets so it has the four core pillars as they call it, iron ore, oil and gas, copper and coal and then also a fifth pillar in potash and that’s more in a slumber mode, but something they can deploy at a later stage. It’s more a development asset. But the key is that all these different commodities have different peaks and troughs and different cycles and they’re able to invest at different times in the cycle. And they do this also off a very conservatively managed balance sheet and that’s the strength in Billiton that you’ve got a company that’s able to deploy capital at the right stage of the cycle but then also have assets that are certainly superior to most other mining groups. So certainly it will give you good terms throughout the cycle.

HANNA BARRY: In terms of the demerger of South32, that was essentially a spinning off of some of those assets, why is that an important shift for the company?

HANRÉ ROSSOUW: I think the key in the South32 spinoff is to focus the business on these four core pillars. What we saw on South32 was that they had a lot of smaller assets that didn’t fit into the bigger group. More in terms of capital allocation, just management’s ability to manage the smaller assets as well. I don’t think that always works that well in a global group where management doesn’t necessarily have the time to correctly manage or to correctly allocate capital to smaller assets. And the strategy really in creating a simple easily manageable business then was to package these assets and put a more appropriate management structure on this. And we then saw effectively 10% of the company handed to a separate management team and BHP investors then got shares in South32, and so you actually had a share in BHP Billiton and the next day you had a share in the new refocused BHP Billiton and then separately also South32, which gives you two different investment propositions. And as an investor you could then decide what you wanted to invest your money in.

HANNA BARRY: Speaking of shares, you did mention that they have this ability to deploy capital at the right stage of the cycle. They’ve got a tightly managed cost base, now also investors have access to South32 as well. The share price of BHP Billiton is nonetheless down around 34% over the past year at R232 or so a share. Is it a buy, is it a sell, is it a hold?

HANRÉ ROSSOUW: I still think it’s a very good investment. One has to recognise the cyclicality of the mining sector, the pressures at the moment with the strong dollar, perhaps underwhelming demand growth we’re seeing in China, but still if you look at the dividend that you get from BHP Billiton you get close to a 7% dividend yield most of which is in US dollars so it actually offers you a very attractive rand hedge. And then certainly on price to earnings basis it trades at just shy of 13 times earnings so you could argue that’s still relatively good value in that share. But I think the key thing is also you’ve got a very strong balance sheet that one can certainly be fooled by a dividend yield that looks attractive, but I think the key question always is the yield sustainable and certainly in the sense where they’ve got a strong balance sheet, and very good quality assets, I would argue that dividend yield is certainly sustainable in the current environment.

HANNA BARRY: Hanré Rossouw is portfolio manager at Investec Asset Management looking at BHP Billiton in Market Update’s new series, Back to the Future.

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