BHP Spending Money Again — This Time, With Prudence

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BHP Billiton’s decision announced last week to approve a capital expenditure of U.S. $2.46 billion for the Spence Growth Option (SGO) at the Spence open-cut copper mine in Chile should come as no surprise given the roll copper has been on this year and the forecasts of supply shortages toward the end of the decade.

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Whether criticism from activist investors Elliot Advisors had anything to do with the decision is doubtful, but comments from CEO Andrew Mackenzie on announcing the investment may well have had one eye on shareholder approval.

The investment will “create long-term value for shareholders in one of our preferred commodities,” the Financial Times quotes him as saying.

Elliott this week disclosed it has a 5% stake in the U.K.-listed shares of the miner, up from a 4.5% position held mostly in derivatives. The fund, founded by billionaire Paul Singer, is right when it says BHP has underperformed rivals and spent billions on mistimed acquisitions.

It is wrong in its solution, however, by demanding the firm return more money to investors through dividends and buybacks and to review an exit from its U.S. shale business.

Share buybacks reward current investors, but do nothing for the firm’s long-term growth. If you are a short-term activist after a quick buck, buybacks have a lot of appeal.

If you are a pension fund, life insurance company or other long-term investor you want to see a 10- to 20-year growth strategy, not a quick buck.

The investment in Spence represents just that kind of solid long-term bet on copper demand.

$2.5 billion buys BHP 185,000 tons per annum of copper concentrate and 4,000 tons of molybdenum for the first 10 years, with the enhancement said to extend Spence for 50 years, according to Reuters. BHP is well able to afford the money, with a buffer from robust iron ore sales, the firm is expected to announce next week in its full-year results that it has generated $14.6 billion in cash flow, according to the Financial Times.

Nor is BHP alone.

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Kaz Minerals has ramped up two new open pit copper mines in the Pavlodar and East regions of Kazakhstan, helping the miner to more than double its first-half production, revenue and profit.

The company reported production of 118,000 tons of copper from January to June, helped by the new mines. Meanwhile, Rio Tinto has started on a giant underground extension of its copper operations at Oyu Tolgoi in Mongolia. Like Spence, the investment is expected to come online around the end of this decade, just as supplies are expected to become constrained.

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Whether the new mine supplies will contribute significantly enough to mitigate the forecast supply shortages remains to be seen, but it is good to see miners are investing again — and at least, for now, in solid organic projects, not overpriced M&A adventures.

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