BHP Group, the biggest mining company in the world, has confirmed that it is seeking out new avenues of growth for the longer term and requires a show of investor confidence to do so.
Like many other major mining companies, it has had a relatively turbulent last decade, with periods of strong growth derailed by industry-specific recessions. With climate change now a regular topic of discussion that threatens to get in the way of BHP’s profit margins if not properly accounted for, it is evident that a new path for growth needs establishing imminently.
However, mining companies have not always been famous for instigating solid investments, and some returns have been notably poor. As a result, some investors are worried about how the prospect could turn out this time around.
During the commodities boom a few years ago, people invested billions and billions of dollars into tough sells such as the US oil industry, where BHP met failure and eventually lost $40bn in the process. It underwrote a $29bn loss when it sold what it had acquired to BP in 2018.
In general, the major mining companies have enabled $900bn worth of investments to go forward but have only returned $350bn to shareholders and wrote off a massive $250bn. This suggests that although shares are marginally up and companies remain profitable, there is a lot to contend with for those trying to make positive returns when embarking in a new direction or diversifying.
However, the nature of mining means that companies have little choice but to invest, or they will run out of raw materials. Efforts to delve into onshore US oil clearly failed, but some endeavors have worked well, and they still post large profit returns most years.
BHP is facing criticism from Elliott Advisors, which is known for being an activist shareholder company. It labeled BHP as unreliable as an investment vehicle.
Peter Beaven, BHP’s Chief Financial Officer, said that the company is now in a better position thanks to new spending rules that partly control what it can put its money into and how much that it can use. Beaven said that BHP is fully aware of the dangers of both over- and under-investing, knowing that either strategy could cause problems for its balance sheets.
Finding a balance was essential, and Beaven believes that the company has ‘made significant improvements.’ He added: ‘We have institutionalized our approach to capital allocation.’
BHP’s plan included lowering its net debt figure by $15bn as well as changing its dividend policy ‘to a more appropriate payout ratio,’ according to Beaven.
He added that, in the future, the company will look to make market moves earlier on and snap up better value investments rather than going for all-out mergers and acquisitions. The issue with the latter, Beaven said, is that ‘you have to pay the market price, and then you still have to get a return.’
This does not mean BHP is shying away from risk. In response to questions about some of its higher-risk investments, Beaven said that the company knows that it could lose everything but wants to take the chance because ‘we could create the tier-one assets of the future.’
With some big decisions still remaining for BHP’s future growth, how its shareholders react could well be key to initiating a new path quickly.