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Elliott’s BHP acquisition: Dividends Yes; Total Victory – Not yet;

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Who lightened the area?

Firstly, if we observe the subject closely, it is inviting to consider BHP Billiton as the one who gouged into demands by Elliott Advisors. As well they seem to have together agreed about selling BHP’s U.S. onshore oil & gas business.

The main thing to mention is that in an official letter from April, Elliott had 3 major points. Two of which were depriving the U.S. shale assets and pushing up the shareholder returns.

But the thing we ask ourselves is, whether the BHP’s decision was firmly inspired by Elliott.. Or it would have happened either way.

Observing the dividends, it is clear that BHP would follow it’s bigger fellow Rio Tinto moves. Trying to return as much cash as possible to their investors. In particular the huge boost of free cash flow coming from higher prices of their base: Iron ore and Coal.

 

Overview

Last Tuesday BHP said that it would triple its final dividend to $0.43 a share. Which is slightly below the expectations of analysts.

”The world’s largest mining company also posted a five-fold rise in annual underlying profit to $6.7 billion for the year to June 30, which was below the market consensus for earnings of around $7.4 billion. (Reuters)”

It could be argued the increase in the dividend was generous.

Second thing worth mentioning, is that BHP decided to pay down net debt. The debt was at the beggining reduced at $10 billion, and this move is definitely to strengthen the company’s balance sheet.

Furthermore, it is possible that Elliott would have preferred the FCF being generated by BHP & used for a share buyback. Makes it much more effective than being used in cutting debt.

“We have determined that our onshore U.S. assets are non-core.”

“We are actively pursuing options to exit these assets for value.” BHP said in its results presentation (Reuters)

Elliott definitely deserves credits for finding a way to enter BHP’s underperforming assets. It is also clear that at some point they saw that $20 investment in shale, made 6 years ago, was not the greatest move they made.

 

Investors Aims

What is likely to be of more relevance to Elliott, and other investors, is how sustainable are BHP’s increased dividends.

When making a commentary, the company was very cautious. Stating that Crude Oil prices will trend higher. Steel demand will slightly grow. While the cost curve for the iron ore is going to continue flattening.

BHP is seeing a slight uncertainty in China’s metallurgical coal; but the outlook for overseas market is in all positive.

In tanto, it seems that BHP isn’t expecting the prices of its major commodities to rally strong. But, it equally it is not forecasting any important declines.

In conclusion, the company should remain a strong generator of cash.  Adding & assuming it remains committed to capital discipline. Returns to main shareholders can increase. But, it’s highly unlikely that the massive jump in dividends, as the one from June 30th will repeat soon…

 

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Western Australia state asks Iron ore Miners to pay cash in advance

 

Important to know on May 29th:

  • Global stocks drift in thin trade; U.S., U.K., China closed
  • Dollar steady in quiet trade; British pound jumps
  • Oil dips as traders weigh U.S. drilling, OPEC cuts
  • Mario Draghi takes center stage
  • North Korea fires another ballistic missile

 

Iron Ore Market

Western Australian state officials are going to ask BHP and Rio Tinto to pay in advance multi-billion dollar fee. In order to exchange the cancelling ongoing intrude on their Iron ore outputs.

Australian state is firmly convinced it will succeed with the current intentions, but miners are not likely to agree. In fact, if they win significant benefits they can possibly consider the option. The mineral-rich state has had more than $23 billion in debt following the end of a mining boom.

Considering all the options, the BHP and Rio Tinto are ready to pay about $3 billion in exchange for cancelling a A$0.25 a tonne ongoing levy. This iron ore levy in their mines could last for further 50 years.

Ben Wyatt won a state election in March this year. The state treasurer supports left Labor party, and he said the proposal is still in very early stages.

“It’s an option that could only be close to crystallizing if you had a range of things in play, one, obviously the engagement and agreement of the miners.” (Wyatt)

 

Miner comments

Rio Tinto spokesman said that the company rejected the payout proposal, and that it does not want to reconsider it. While the BHP spokesman refused to comment on this subject.

The miners will meet with government officials this week. But there are some rumors, that the proposal could possibly inspire some unwelcome precedent.

“The last thing Rio and BHP want is to become the state’s go-to ATM every time there’s a financial crisis.”  (Reuters source)

The A$0.25 a tonne levy raised around A$150 million for Western Australia last year, based on the two company’s combined output of about 600 million tonnes of iron ore. The state earns far more from a 7.5 percent royalty based on the value of their sales, which contributes well over $2 billion a year to state coffers. (Reuters)

 

The conditions

Miners will accept the proposal only if they benefit substantially.

“There would have to be a motivation from the miners’ point of view unless they were feeling philanthropic.” Said Pietro Guj, the university professor.

The current plan follows a proprosal by a rival party in the lead up to the March election.  It said  the levy should be raised to as much $5 a tonne, but this proposal was condemned by the miners.

Only Rio Tinto and BHP pay the rental fee which applies to mature projects. The other projects, including those owned by Fortescue Metals Group and Gina Rinehart’s Hancock Prospecting would be liable to pay it from 2023.

 

 

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IRON ore in China: Imports ease in April amid gloomy glance

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Reasons

China’s April iron ore down, due to vessel-tracking and port data suggesting a decline of several million tonnes from the near-record levels recorded in March.

83.27 million tonnes of the iron ore was dismissed at Chinese ports in April. Down 3.7 percent from March’s 86.46 million.

The vessel-tracking and port data often show numbers below the official Chinese customs data. Who reported 95.56 million tonnes of iron ore imports in March. That would be the second-highest on record. The ship data does point to lower imports in April. About 3 million tonnes.

 

China’s largest suppliers

It seems that much of the decline in iron ore imports was borne by Australia. Being China’s number one supplier, with the data showing imports of 53.9 million tonnes in April. Down from 58.9 million in March.

 

Rather, second largest supplier Brazil saw Chinese imports of 18.48 million tonnes in April. UP from March’s 16.54 million.

The lower imports from Australia in April are the result of earlier weather-related disruptions. There was rainy period in Western Australia state that affected both mines and rail networks.

This means imports from Australia are likely to recover again in May, which may be a bearish signal for prices if miners such as Rio Tinto, BHP Billiton and Fortescue Metals Group decide to chase volumes over prices.

 

Forecasts & Opinions

This can already partly be seen by the 11 percent jump in iron ore shipments from Port Hedland, the terminal used by BHP and Fortescue, to 34.86 million tonnes in April from 31.5 million in March. Sailing time lasts of around two weeks between northwest Australia and China.

Ultimately iron ore prices are driven by steel prices and margins, and here the outlook is less certain, with the main Shanghai rebar contract trending lower in recent weeks. Because the resilience of China’s infrastructure and construction spending.

 

Chinese steel

While Chinese steel output has remained robust so far this year, the market seems to be rolling toward the opinion that margins will be under pressure. Specially in the second half of the year as domestic demand growth slows and exports struggle.

Already Chinese steel mills are seeing lower exports, with shipments of products sent overseas slumping 25 percent to 20.72 million tonnes in the first quarter of this year compared to the same period last year.

Exports are the key factor for the 800 million tonnes-a-year Chinese steel sector. And a significant downturn is another important factor for the industry.

 

Iron ore prices

Spot Asian iron ore prices have performed worse than Chinese steel rebar futures in recent weeks. Dropping 28 percent from a peak of $94.86 a tonne on Feb. 21 to $68.68 on Wednesday(May 3rd).

The sharp decline is partly due to the strong rally over the past 13 months, which saw prices almost triple. Sending iron ore to levels that appeared well overbought. Given the market remains well supplied and will have to absorb more than 100 million tonnes of new low-cost production from Australia and Brazil this and next year.

While China buys about two-thirds of seaborne iron ore, this still leaves one-third that can influence the market. Recent news are pretty positive for the major exporters.

  • Japan’s imports of iron ore in April reached the highest since vessel-tracking data started in January 2015. With 11.62 million tonnes discharged during the month, up from 10.45 million the prior month.  Asia’s third-largest importer, South Korea, saw 7.17 million tonnes offloaded in April, the most since October 2015, according to the data. (Reuters)

April’s fall in China’s iron ore imports is related to earlier weather issues in Australia. Considering the info that shipments have already recovered, there is unlikely to be any supply tightness.

So the price is exposed to Chinese demand, and then the outlook is less certain and will depend on how much spending stimulus the authorities in Beijing consider suitable.

 

 

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Rio Tinto’s iron ore output cut by weather conditions

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About the company

 

Rio Tinto is a British-Australian multinational, and one of world’s largest metal and mining corporations. Rio Tinto(RIO.AX) (RIO.L) on Thursday said first-quarter iron production from Australia fell 3 percent. In comparison with the same period a year ago. Mostly due to wet weather at its mines. Heavy rain ruined Rio’s outputs. Despite weakening ore prices it kept its full-year guidance intact.

 

Pilbara

The Pilbara is a large, dry, thinly populated region in the north of Western Australia. Also It is known for its Aboriginal peoples. Furthermore, having ancient landscapes, the red earth, its vast mineral deposits, in particular iron ore. Pilbara mines output totaled 77.2 million tonnes, the company said. Full-year shipping guidance was kept at 330 million-340 million tonnes.

Shipments from Australia

 

Shipments from the Australian mines in the first quarter were flat at 76.7 million tonnes against the year-ago period, but down 13 percent from the previous quarter.

Ship loading was impacted by a cyclone, with parts of its rail line hit by heavy rainfall.

“Despite these disruptions, shipments were in line with the first quarter of 2016 and guidance for 2017 remains at 330 to 340 million tonnes,” the company said.

 

Iron ore producers are facing a promptly cut down of the iron ore prices. Rio Tinto and rivals Vale (VALE5.SA), BHP Billiton (BHP.AX) (BLT.L) and Fortescue Metals Group (FMG.AX) . It is happening amid waning demand from China, the biggest market for ore.

China imported 90.3 million tonnes of iron ore in March this year. China has the biggest appetite for iron ore and also the biggest market.

The worldwide iron ore surplus reached 70 million tonnes last year – more than total U.S. consumption last year – and could balloon to 90 million tonnes in 2017, according to Citigroup.

Iron ore prices are down more than 33 percent since a mid-February peak of $94.86 a tonne and forecasters are warning of a further pullback. (Reuters)

 

Iron ore prices would backtrack to U$55 a tonne in the fourth quarter. Australia’s Department of Industry, Innovation and Science predicted. Next year’s forecast calls for iron ore prices to reach $51.60 a tonne at the end of the year.

 

Other minerals

In other minerals, Rio Tinto stuck to a full-year target of producing between 3.5 million 3.7 million tonnes of aluminum following a 2 percent rise in first-quarter production.

 

Mined copper guidance was subdued to 500,000-550,000 tonnes from as much as 665,000 tonnes as a result of a strike at the Escondida mine in Chile. And the curtailment of production at the Grasberg mine in Indonesia. While Chile is the world’s biggest copper producer, and sales of the metal make up for about 60% its export earnings. In Escondida mine strike, workers gave up because they asked for different conditions.

In conclusion, refined copper production guidance remains unchanged at 185,000 to 225,000 Rio said.

 

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