MARKETS SPECTATOR: BHP's debt determinedness

BHP has joined the global search for yield. The company sold 20-year, $C750 million of bonds with a coupon that was an eye-popping 3.23 per cent for a single-A credit. Given that AAA-rated Australian bonds currently yield about 3 per cent, BHP’s latest bond sale, to retire presumably more expensive commercial paper, must make incoming chief executive Andrew Mackenzie very happy indeed.

The world’s biggest miner is scouring the world’s debt markets in order to find the best deals. It doesn’t want its $US34 billion of gross debt, as of December 31, tied to one market or maturity. BHP has debt stretching out over 30 years. But while global central banks have enabled BHP to price its debt cheaply, the stock remains a laggard. BHP shares had gained 59 cents, or 1.8 per cent, to $34.26 at 12:59pm AEST, pushing the company’s share price gain to 2 per cent over 12 months. The S&P/ASX 200 Index is up 20 per cent over the same period.

Not so fast, argue BHP. The company claims its total shareholder return, capital appreciation and return to shareholders, between 2007 and 2012, has been 49 per cent. It says it’s on track to deliver $US1.9 billion in annual cost cuts. Exploration and business development have been cut back. The only new exploration projects are around copper, oil as well as shale oil and gas developments. BHP has sold its interest in diamond, titanium, uranium and copper mines.

But investors have yet to truly buy into the new BHP narrative. The buying spree of chief executive Marius Kloppers, who retires Friday, has still not receded in their minds. Kloppers tenure was marked most spectacularly by a failed $US130 billion attempt to acquire Rio Tinto. The BHP chief also launched an unsuccessful $US39 billion takeover attempt for Potash Corp. Still, Kloppers paid $US4.75 billion for Chesapeake Energy’s Fayetteville assets and spent $US15.1 billion on acquiring shale gas company Petrohawk Energy.

BHP insists it has changed. But it acknowledges that it may take time to convince some. Mackenzie speaks in Barcelona on May 14 at a Bank of America Merrill Lynch conference. He is expected to reiterate the company’s commitment to invest in high-return businesses and to pay progressive dividends. What may help Mackenzie’s interaction with fund managers and analysts is that his era at BHP may yet start amid a share price surge. It will be not because there has been any radical improvement in the company’s bottom line but because investors simply think miners are cheap and banks are not.