BHP, Give Us Back Our Christmas Party

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There’ll be no Christmas at BHP Billiton [ASX:BHP] this year. The world’s biggest miner is cancelling up to dozen holiday parties across its Aussie iron ore hubs. Some investors may welcome the move, but BHP is overstepping the line.

Hard as it may try, there’s no reasonable way to justify cancelling Christmas parties. Not when the decision is based on little else but an attempt to buy public goodwill. The company has been on the defensive since the start of the month, following the Samarco tragedy in Brazil.

BHP owns 50% of the Samarco mine in a joint venture with Vale [NYSE:VALE]. On November 5, a dam at the mine collapsed, killing nine people. The disaster caused significant environmental impact. It affected 11 nearby villages, while also dumping sludge into a local river. Brazilian authorities reckon it’s the worst environmental disaster the country’s ever seen.

The catastrophe piled the pressure on BHP, having already watched its stock price slide. Shares have fallen $5, to $19.81, in the past week alone.

It added to an already difficult year for the embattled miner. BHP’s biggest revenue maker, iron ore, has borne the brunt of the commodity downturn. The price of iron ore fell to US$45.58 a tonne this week. It’s now down by two-thirds since the height of the mining boom.

To top it off, BHP’s generous 8% dividend is under the gun. Investors are nervous the company will have little choice but to cut payouts.

Considering all that’s happened, the Christmas axe isn’t a complete surprise. But it doesn’t justify it either. BHP wants to restore some goodwill among investors, which is fine. But using the tragedy as validation for doing so isn’t a good way of going about it. These employees are entitled to a Christmas party. Just like everyone else.

Behind these good intentions are suspect motives. They’re subtle, but they’re there. BHP is shifting the focus away from its other problems. And it’s trying to publicise that as much as possible. Yet it might backfire among investors that see right through it.

Truth is, BHP stuffed up. Disasters like these are usually the result of a lack of oversight, and not from the men on the ground either. Since no one knows why the dam broke, the responsibility falls on upper management. They’re the ones responsible for insuring that operations are safe. Not just for workers, but for local populations too.

Remember, this tragedy took place in a country a long way from Australia. That doesn’t make the situation any less terrible. But it brings to question as to why BHP is punishing Australian-based employees? People who have little to no links to the Samarco mine.

But that’s how it goes. The big wigs stuff up, and proceed to punish the rank and file.

Yet not everyone is of the opinion BHP is doing the wrong thing. There are plenty of people on social media supporting BHP’s decision. Some make the point that celebrations at a time of tragedy are uncouth. Maybe so. But the links between the two here is questionable. What’s more, you won’t see BHP execs cutting their own bonuses this season. With the responsibility they have in ensuring safe practice, maybe they should. But there’s no surprises as to where they’ll likely be spending their Christmas. Probably on a cruise boat off Ipanema beach…

If BHP’s heads really cared about the victims of the Samarco mine, they’d have delayed making this announcement. They could have done it in mid December, when the disaster wasn’t so recent. But they didn’t. They chose to play their card now. And they did it for selfish reasons.

Ultimately, this isn’t about making morally right decisions. It’s about shifting the focus away from BHP’s other problems. It’s about improving the company image. Yet it does nothing but demonstrate a lack of moral integrity.

So BHP, give your employees their Christmas party. Don’t penalise them for mistakes they never made. Help the people of Brazil by paying for the mess you’re responsible for. But don’t resort to petty PR campaigns for a little goodwill. It won’t help your share price. And it won’t convince investors your dividend policy isn’t changing. It just makes you look desperate.

The future for BHP’s copper operations

On a brighter note for BHP, the future for copper looks better. From the Australian Financial Review:

…investors should look at exposure to copper to capitalise on China’s transition from heavy industry and exports to more consumer-driven growth, say a range of mining executives and portfolio investors.

They say while oversupply of iron ore to feed China’s increasingly export-oriented steel mills is undermining the mineral’s price, changes in the country’s urbanisation program [particularly in the use of electricity with renewable energy], coupled with development in India, should ultimately be good for copper producers’.

By BHP’s own estimates, this copper rebound might be some way off. The company reckons copper prices will make a comeback in 2019. That’s when it expects the market to become undersupplied.

But there’s some doubt about how likely this rebound actually is. AFR reports:

‘…as wealth in China spread and the middle class expanded, families would outgrow their state-built one-bedroom units and demand bigger, privately-built accommodation. These would contain more wiring and appliances with copper than typical accommodation today’.

And, according to UBS’s China economist Donna Kwok:

In terms of policy levers China still has to pull, it is still going to be increasing infrastructure support and investment support. Another level that the government can also pull is property policy easing, which is much needed to digest excess inventory’.

That might be key. If Chinese authorities stimulate the housing sector, then commodity exporters like BHP can benefit from that. But it can’t come soon enough. It’s still three years before that either takes place…or doesn’t.

Until then, iron ore prices are likely to remain low. With declining revenues, it’ll make BHP’s generous dividend policy harder to maintain.

In the meantime, its share price faces the risk of sinking to sub-$15 levels, last seen in the early 2000s. Christmas parties might be the least of BHP’s problems…

Mat Spasic,

Contributor, The Daily Reckoning

PS: The declines across the mining sector have dragged on the ASX for most of this year. But they might only prove the tipping point for a larger crash. The Daily Reckoning’s Vern Gowdie believes we’re going to see a catastrophic collapse on the ASX.

Vern is the award-winning Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. He’s ranked as one of Australia’s Top 50 financial planners. Not only does Vern predict a major crash, but he’s convinced the ASX could lose as much as 90% of its market cap.

In a special report, ‘Five Fatal Stocks You Must Sell Now’, Vern wants to help you avoid the coming collapse. In it, Vern shows you which five blue chip Aussie companies could destroy your portfolio. You’ll be surprised to learn which blue chip miner makes Vern’s list. To find out how to download the report, click here.

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