Who Could BHP Billiton Acquire?

Amidst all of the market turmoil over the past few weeks, commodities have been hit just as much as equities, but that did not stop BHP Billiton BHP from posting record earnings. The Melbourne, Australia-based company reported that its annual profit rose nearly 86% from a year ago, thanks in large part to iron ore and copper. For the twelve months ended June 30, BHP said net income was $23.6 billion. This handily beat Wall Street estimates of $22 billion. A year ago, the world's largest miner reported earnings of $12.7 billion. Revenues were sharply higher, rising 35.9% year-over-year to $71.7 billion. "We remain positive on the longer term outlook for the global economy," the company said. "Over the past decade, emerging economies have contributed more to global growth than the developed world and we expect their share to expand as the process of urbanization and industrialization continues." Despite the record earnings, thanks in part to China and other emerging markets, BHP said that cost pressures could hurt BHP. "In the current environment, tight labour and raw material markets are presenting a challenge for all operators, and BHP Billiton is not immune from that trend," the company said. It does expect "robust demand" in the short and medium term, however. BHP declared a final dividend of 55 cents a share, up 20% from last year. BHP trades at 10 times 2012 earnings, and with the dividend raise, BHP now yields just over 2.4%, more than the yield on a 10 year U.S. Treasury. With assets all over the world, and plenty of cash to spend on projects, acquisitions and dividend raises, BHP is poised to benefit from robust growth around the world, thanks in large part to China. CEO Marius Kloppers said that he sees the potential for mergers and acquisitions, and BHP is no stranger to acquisitions. Last year, BHP tried to acquire Potash POT, only to be rejected by the Canadian government. After BHP was rejected, it decided to acquired natural gas assets, both from Chesapeake CHK and PetroHawk Energy. The company recently finished a $10 billion buyback program in June, well ahead of schedule, and Kloppers made a point that it wants to protect its credit rating after the Petrohawk Energy acquisition. As such, another major acquisition is probably not going to come soon. It is however, going to be expanding its presence into potash in Canada, where BHP has a small mine. It is no secret that BHP sees potash mining as a future growth driver of the company. With nearly 7 billion people in the world, the world's food shortage is not going away anytime soon. It is pretty obvious to see where BHP is positioning itself, and the eventual M&A or continued expansion could prove to be a driver of profits for decades to come. ACTION ITEMS:

Bullish:
Traders who believe that BHP will look to acquire potash producers might want to consider the following trades:

• Potash Corp. is obviously out. There are smaller potash prices that could be in play, however. Names like Intrepid Potash, Inc. IPI, Agrium AGU could be in play, or potentially even CF Industries CF.

Bearish:
Traders who believe that the world will solve its food shortage soon may consider alternate positions:

• BHP will likely continue to benefit, as it is a diversified miner, but potash producers could see shrinking margins. These names could be a short.
  
  

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