BHP Withdraws Potash Buy-Out Offer - Analyst Blog

Mining giant BHP Billiton Ltd. (BHP) decided to withdraw its buy-out offer for Canada's Potash Corp. of Saskatchewan Inc. (POT), the world's biggest fertilizer manufacturer, after non-clearance by the Investment Canada Act.

Capital which was raised to fund the bid will now be used for buyback of shares worth $13.0 billion, which is going to add to shareholder value. However, BHP Billiton will suffer heavy losses of $350 million, of which $250 million has been decided to be shown as an exceptional item in the December 2010 interim accounts.

BHP Billiton sustained a production loss based on the dissolution of the joint venture with Rio Tinto (RTP). The joint venture would have substantially increased BHP Billiton's iron ore production in future. The joint venture for producing iron ore in Australia was dissolved with no break fee when it was disapproved by some of the Australian regulators.

Nevertheless, BHP Billiton reported higher production in the first quarter of fiscal 2011 with a 6% year-over-year increase in its iron ore production and growth rates of 3%, 3% and 10% in its oil and natural gas, copper and coking coal production, respectively.

During the quarter, expenditure on minerals exploration and petroleum exploration was $129 million and $74 million, respectively. BHP Billiton also provided guidance of $900 million for petroleum exploration expenditures in fiscal 2011. The gradual market recovery was the prime reason for the increase.

Further, we believe that the ongoing industrialization in China, the largest iron-ore importer, will improve the demand and price of its products in future. Fiscal 2010 bears evidence of the fact that both demand and prices improved due to strong recovery in China and India.

BHP Billiton's commitment toward long-term growth through its key investment strategy looks promising with 20 projects on hand. During fiscal 2010, BHP delivered five growth projects and approved two major growth projects totaling $695 million and made pre-commitments totaling $2,237 million to start the work on four other projects. BHP Billiton at present has 20 projects on hand for a total budget of $25 billion.

The progressive dividend policy with fiscal 2010 dividend of 87 cents per share, up from 82 cents in fiscal 2009, enhances shareholders' sentiments and inspires our optimism about the stock.

BHP Billiton has a competitive advantage in this uncertain environment based on its diversified portfolio of low cost and high quality assets. The company is well-positioned to benefit as the markets recover.  We maintain our Outperform recommendation on the stock. The stock also currently retains its short term Buy rating equivalent to a Zacks #2 Rank.