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13 Nov 2012

Big on BHP Billiton

Twenty years ago few would have believed that the largest mining company in the world would emerge from South Africa, yet not involve Anglo American or De Beers. BHP Billiton is that company and one that has consistently been among the largest holdings in Foord portfolios for the past five years.

BHP Billiton was created in its current form in 1998 when Brian Gilbertson crafted the merger of the SA-based Billiton Plc with Australia’s BHP Ltd. The combined entity is listed in London, Johannesburg and Australia1. With a market capitalisation of R1.5 trillion, BHP Billiton is now four times larger than Anglo American.             

We regard BHP Billiton as a quality company that meets most of Foord’s investment requirements from a fundamental analysis perspective. It has a sustainable competitive advantage in its portfolio of mining assets, an excellent management team and a sound balance sheet. It is strongly cash flow generative, which enables the company to fund its numerous growth prospects from internal resources.

BHP Billiton owns what are considered to be tier 1 mining assets. These are mines that are amongst the largest of their kind in the world, yet still have significant expansion potential. They also exhibit lower operating costs than most mines owned by their peers. These top quality assets are located in politically stable countries that are also well diversified from a currency perspective. Examples of BHP’s mining assets include iron ore, coal and copper in Australia; oil and gas in the USA; potash in Canada and copper in Chile. Sadly, less than 3% of their productive assets are situated in South Africa, reflecting management’s view of the difficulties facing local mine operators.

At Foord, we believe one of the best ways to protect and grow clients’ capital is to buy and hold a growing but dependable earnings stream, bought at an attractive price. Since 1998, BHP Billiton has grown both earnings and dividends at a significantly faster rate than Anglo American and much of its peer group.  It has been one of the top performing resource shares on the JSE over any period since its formation in 1998.

When building portfolios we are always cognisant of diversifying and managing risk with the objective of preserving, but also growing, our clients’ capital in real terms. Client portfolios have had significant exposure to South African consumer spending for the past few years. A good proportion of this exposure has been via the retail sector. Retail shares have delivered exceptional returns but have always been at risk to a sudden weakening of the rand (a weaker rand raises their input costs and squeezes margins for retailers). Exposure to resource shares, whose earnings immediately benefit from a weaker rand, provides a useful hedge to the retail exposure in portfolios.

In a nutshell, BHP Billiton serves a dual purpose in our clients’ portfolios. Not only is it a quality, well- managed business that can justify being held from a bottom-up perspective, but it also provides useful diversification benefits to the overall portfolio by reducing investment risk.

1 Although the Australian operations of BHP make up 60% of the merged entity, there have been two South African CEOs (including the incumbent Marius Kloppers) and two American CEOs. An Australian is yet to take on the top executive position.

Mike Townshend
Head of equity research at Foord Asset Management

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