BHP Billiton, Rio Tinto Acquisitions Depend on Metals Prices, Demand

Posted by Dan Denning on Jun 19th, 2007

Now that South African Marius Kloppers is running Australian-icon BHP (ASX:BHP), is he more interested in Canadian aluminium producer Alcan (NYSE:AL) or America’s own Alcoa (NYSE:AA)? Or should he be more interested in his own shares?

Kloppers does not exactly have the same problem David Neal has at the Future Fund. Neal has to invest the money in something to offset a future liability. He cannot return cash to public pensioners.

BHP, on the other hand, does not have to make an acquisition. In February the company bought back nearly US$13 billion in its own shares. Chip Goodyear decided the best use of cash was to return it to the shareholders in the form of a buy-back.

Whether the new regime at BHP – or Rio Tinto (ASX:RIO) for that matter – decides to pursue major acquisitions depends on where they think we are in the commodity cycle. If you think we’re at the top of the cycle, where prices are more likely to decline than increase, you return cash to shareholders, or save it for a rainy day when assets are on sale for cheap. Or, cashed-up from years of bumper profits, you see consolidation in the sector as the big fish buy the little fish, and prices for metals gradually (or not so gradually) decline back to cyclical lows.

But BHP and Rio must think there is more life to the boom yet. We don’t know what their price forecasts for base metals are. But we do know nearly everyone on the planet has been surprised and taken a bit off guard by the strength and persistence of metals demand from China and the emerging world and is rushing to meet the demand with new resources.

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