Cash Rich BHP Billiton (BHP) on the Prowl for Mergers

After the proposed mega merger between BHP Billiton (BHP) and Rio Tinto (RTP) fell apart [Nov 8, 2007: Rio Tinto Up ... $103!] , any deal BHP Billiton considers from here will seem "small" by comparison. I am hoping for more of "latch on" acquistions rather than something huge that will weigh on the stock for a period of quarters. There has been some scuttlebutt raised about going after fertilizer assets, specifically potash (which is mined) but as I read about a potential foray into oil & gas that would raise a whole different set of questions.

Via WSJ

• BHP Billiton, the world's largest miner, has built up about $18 billion in cash during the last year and expects to use some of it, along with additional borrowings, to acquire large rivals, possibly setting in motion a new round of acquisitions in the mining sector.
• BHP, which launched the last major cycle of industry mining mergers when it went after its chief rival, Rio Tinto in 2007 with a $68 billion bid, said it has identified "four or five opportunities", all large mining, oil or gas companies, or assets in those sectors, more likely in mining. It would expect to make a move within the next 12 months.
• "We have no pressure to do it. But I can tell you we have done a lot of work," said BHP's Chief Commercial Officer, Alberto Calderon, who is spearheading the company's acquisitions efforts. "Out of this crisis, we would like to put our balance sheet to work. At some point, you have to put your money where your words are," said Mr. Calderon.
• Mr. Calderon said that BHP has set aside about $10 billion this fiscal year, which began July 1, for development of new projects and expansion of existing ones.
• Mr. Calderon declined to name potential targets but said the company wanted to expand in certain commodities: iron ore, copper, coking coal, petroleum and potash, which is used as fertilizer. (all make sense to core competency)
• BHP wants to move relatively quickly, before the economy picks up more strongly, causing prices to increase and assets to become more expensive. It used the same strategy in 2001, when BHP and Billiton combined into one company, which was well positioned to profit from record commodity prices.

Many familiar names in the "speculation"

• U.S.-based Freeport-McMoRan Copper & Gold Inc., the world's largest publicly traded copper company, is a possibility, say some analysts. It has some lower-cost copper assets and sizeable gold operations. With a market capitalization of $29 billion, Freeport would require a sizeable offer but smaller than BHP's offer for Rio Tinto, which ultimately fell apart when the two sides couldn't agree on price.
• Another potential target is Potash Corp. of Saskathchewan Inc., Canada. Potash is considered a growing market because of the need for fertilizer to grow more food.
• BHP could have its eye on Anglo American PLC and Xstrata PLC, two mid-sized miners. But those companies may not offer enough synergies in terms of geography and product, say some mining analysts. (Xstrata often linked to BHP)
• Anglo, which is struggling and selling off assets, is a large producer of platinum, which requires deep excavation and can be dangerous. BHP has said it's not interested in mining platinum.
• Xstrata is heavily invested in coal and a combination with BHP could trigger regulatory issues because of BHP's portfolio of coal.

Now this would be the mother of all buyouts...

• Brazil's Vale SA is an unlikely target because it is partly owned by the Brazilian government, which analysts say would be reluctant to cede to foreign ownership and control.
• BHP has said that it wanted to generally stay near existing assets and in countries where conducting business is easier and more predictable.
• More attractive are assets in Australia, U.S., Canada, Chile, Indonesia and Colombia.

[Aug 12, 2009: BHP Billiton - No Quick Recovery Coming, but Cash Flow Enormous]
[Nov 13, 2007: Chinese Worried About BHP Billiton/Rio Tinto Deal]

Long BHP Billiton in fund; no personal position