Never Been Kissed

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–Poor BHP Billiton. The Big Australian just can’t get a date to the prom (or the year 12 formal). Today’s Australian Financial Review contains the jaw-dropping revelation that since Marius Kloppers took over as CEO in 2007, BHP has spent over $875 million on abandoned deals. That’s a lot of money to spend on dinner and a date without even getting a kiss goodnight.

–The three main failed amorous advances were the pass made at Rio Tinto, the indecent $350 million proposal made to Canada’s Potash (rejected by strict Canadian regulators/parents), and the proposed merger of BHP’s and Rio’s West Australian iron ore operations. Is Marius Kloppers a star crossed corporate lover or just a CEO with too much cash and not enough to buy?

–It’s a question BHP’s shareholders should probably take up with him. A billion dollars is a lot of money to spend for no result, even for a company that’s slated to generate about $40 billion pre-tax earnings over the next few years. The issue for investors is whether the management is being a good custodian of shareholder capital.

–We’re going to put the question to our valuation guru Greg Canavan. Greg’s been doing a survey of the Australian investment landscape from the perspective of someone who believes in both sound money and sound investment principles. We’re calling it the Sound Investments Series. You can sign up to get the next report (and view the previous two) by going here. The Series is free, for now.

–The first two instalments were on the big retailers and the big banks. The next one—due out this week—is on the big miners. Mining is a capital intensive, cyclical business. Mining companies (producers anyway) used to be valued quite conservatively. But nowadays some analysts are valuing mining companies like growth stocks, based on pretty optimistic earnings estimates (commodity prices that never fall because China grows at 9.3% for the next twenty years).

–Greg is probably not the sort of analyst who’s going to value BHP like a growth stock. But we haven’t seen the final report yet either, so you never know. In any event, BHP is a pretty good case study for how to determine what an acceptable rate of return is for shareholders. Are the managers generating regular and healthy returns on shareholder equity…or are they just coasting on higher commodity prices and regular growth in production volumes…without growing the resource base?

–The company has been growing its net operating cash flows by a compound annual growth rate of 21% since 2002. You can attribute that impressive performance to the rises in underlying commodity prices (iron ore, coal, and oil, where BHP is surprisingly one of Australia’s largest crude oil producers). But when you’re generating cash, it presents a problem. What are you going to do with it?

–Granted, having a lot of cash to throw around isn’t a bad problem, although it’s no guarantee you’ll get what you want either. Having a lot of cash is a good test for management. And based on BHP’s decision to buy back another $4.5 billion in stock yesterday, it’s a fair time to ask if BHP’s management is making the best use of its cash.

–Resource investors generally don’t want their money back in the form of a dividend, or increasing earnings per share based on a reduction in the number of shares on offer after a buy back. Mining companies (and oil companies, since BHP is one of those too) must constantly grow their resource base since they are constantly depleting it with production. That’s not to say you shouldn’t buy your own shares if you’re a CEO and you think they are good value based on what you know of your own company. But you don’t’ want to be spending more money on shares than you are developing new assets.

–Lately, BHP has taken to pursuing acquisitions to grow revenues and its asset portfolio. That doesn’t mean its organic growth is terrible. But it does mean the company may have trouble achieving higher rates of growth if it keeps getting shot down on acquisitions. This would presumably affect the valuation of the share.

–So what is the share really worth now? We’ll wait until we see Greg’s report and get back to you. In the meantime, this whole discussion is a good reminder that passive buy-and-hold investing in blue chip shares is not without its risks. This is especially true in Australia where the largest capitalised companies in the share market (and the most widely owned in retirement funds) are miners and bankers.

–It would be an interesting discussion if you set out to decide which business was riskier these days, a gold mine or a bank. But our point is that if you aren’t already doing it, it might be worth putting some thought into when and where these stocks make their cyclical highs and lows and when they are looking overbought or oversold.

–This, of course, is precisely what Murray is up to. Murray, if you don’t already know, runs the Slipstream Trader. His job there is to keep a technical eye on everything and let readers know, based on his theory of price action, when he sees decisive (or false breakouts) in a particular share. You can read more about how he’s trying to help you make ‘bonus gains’ from stocks you may already own.

–While we’re on the subject of the miners, by the way, why aren’t any of their CEOs telling the government to stick it where the sun don’t shine with respect to the Mineral Resources Rent Tax? It’s telling that in recent weeks two international organisations (the OECD and the IMF) have both come out in favour of the tax and its broader application at a higher rate.

–Typical. These organisations have the best interests of big government at heart. And that may be different than what’s best for Australia or Australia’s best businesses. It’s also worth noting, in a totally non-xenophobic way, that the government’s pre-election agreement was made with an Australian company run by a South African, a dual-listed Rio Tinto that has international interests, and a Swiss company.

–It’s clear what was in the deal for everyone who was at the table. But there were a lot of people that weren’t even invited to the table. Or perhaps they were, but as the main course rather than an equal partner in how to carve up Australia’s resource wealth.

–Trans-national organisations that serve the interests of the nation state are always encouraging higher taxes and more government intrusion into the economy. Because that’s worked so well. The government here will use the OECD and IMF statements as support in its campaign to subdue and intimidate the mining sector. They will love it because it encourages them to take what’s not theirs, which is something the government is especially good at.

–Where is this generations Lang Hancock? Isn’t there anyone in the Australian business community who is willing to tell the government that it’s nothing but a pack of plundering, meddling, no-nothing boobs who’ve probably never met a payroll or created real wealth in their life?

–We understand that in a small elite community, there are probably repercussions for speaking the truth about possibly vengeful public servants with “long memories.” But someone should be sticking up for the interests of free enterprise. When the State tries to paper over its over-spending ways by stealing away the profits from whatever business happens to be most profitable at the moment (yesterday it was the miners, today it’s the banks), it perpetuates wasteful spending and bad government.

–It’s also galling to be told by people who don’t really believe in free enterprise how to run your business, or that you owe it to them (and will be coerced) to run your business for the benefit of someone else (as if running your business to benefit your customers, employees, and shareholders isn’t enough).

–Worst of all, if you let the government believe it can tax you whenever and however it wants, it perpetuates the idea that a bunch of mealy-mouthed and power hungry bureaucrats from Canberra are in the best position to decide how much profit is too much and who should be punished and rewarded.

–Enough already. Tell these people to crawl back into their cave of non-understanding and quit doing real damage to one of Australia’s most successful and competitive industries. Australia’s sweet spot in the global economy allows the mining tax to be perceived as sensible when it’s anything but. It’s clumsy, stupid, blundering policy made by people who don’t understand mining but do understand theft.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. BHP didn’t own coal so it ticked off the carbon scheme. Now they’ve (the Australian executive) had their little mates that they sow into the OECD write the narrative on broadening the resource base. The BHP board might even reap what it sowed. It sure deserves it anyway going by the scorecard on what they are doing with value creation in M&A. Having Schubert in the BHP boardroom was environmental pollution and they’re unlikely to get well again soon.

    In terms of equities it doesn’t matter much anyway because all Bernie Fraser’s little index chasing mates at the super funds know exactly how it’s going to be and will cook it up accordingly with the mandatory cash they get every week from PAYE earners. If it was otherwise golly gee all the mugs might get spooked and pull their funds into cash and leave Bernie’s socialist super concoction in he middle of Australia’s worst ever liquidity crisis.

    Here are the ASX indexes from the middle of the real onset of the crisis in May 2008. Funny how they all converge to the middle isn’t it. The darling indexes will have their little nuanced runs but eventually all but the current outliers are being brought back to consensus.

    XEJ energy -11.9
    XXJ financials x prop -9.8
    XHJ healthcare -11.3
    XNJ industrials -29.4
    XMJ materials -15.6
    XPJ property trusts -53.5
    XSJ consumer staples +3.4

    The soviets got to own the show down under.

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  2. The above is expressed in + or – % from that 2008 base date til today

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  3. Thanks for linking to “Hancock’s Australia” on our site. Over 50 people clicked through from this article so far. Here is another relevant Hancock passage, this one from his book Wake Up Australia (http://economics.org.au/2010/07/wake-up-australia-2/):

    Unfortunately, instead of sticking by “free enterprise”, most principals of organisations in Australia give lip service to free enterprise but “chicken out” when they come up against Canberra. For instance, in the words of the Australian Mining Industry Council: “The industry is subject to bureaucratic controls over many day to day matters and the maintenance of a certain amount of good will is necessary for our survival”. In other words, people keep feeding the crocodile in the hope that he will devour them last.

    This attitude of currying favour with the Canberra bureaucracy is typical unfortunately of not only the big mining companies, but of most major companies in Australia. What they fail to understand is that governments view “Free Enterprise” with hostility because it represents a counteracting power to the state.

    When I pleaded with them to take some positive action against socialism, their reaction was: “We do; we are very active on a low key basis; we have done much work behind the scenes to effect the best overall results”; I must stress that these words are an oft repeated chorus. I have personally heard them from the lips of a cross section of the chief executives of the top companies in Australia.

    As far as the mining industry is concerned, “the best overall results” following the corporate low key policy yielded the following tragedies:

    1) A super coal tax;
    2) The Fraser Island repudiation;
    3) A “big stick” export license threat over the whole industry;
    4) The Variable Deposit Rule still on the statute books;
    5) A threat of Resources Tax only just around the corner;
    6) Likewise a wealth tax;
    7) A few so-called aboriginals and communist-controlled unions running the government;
    8) Excessive specialised taxes on mining such as royalty which other industries do not pay;
    9) The acceptance of the Fitzgerald Report without a fight, resulting in the removal of tax inducements to capital;
    10) The acceptance of the philosophy that profit is sinful (the press reported “Utah’s sigh of relief” because its profit had declined).
    11) No security of tenure either for the discoverer or investor in minerals.
    12) The adoption of the all-party policy of stopping foreign risk capital investment under an absurd 50-75% Australian participation rule (A 2 year long all-party investigation was presented to the present Cabinet. It failed to find any instance of foreign capital being harmful.);
    13) The vilification of a company that made big profits by working leases that Australian companies would not work;
    14) Acceptance of the mining industry being saddled with unnecessary environmental impact studies.
    15) Acceptance of Connor’s policy (announced by Anthony) of government control of major mineral sales negotiations.
    16) Control of exchange rates to the detriment of exporters.
    17) Maintenance of enormous tariff barriers, the cost of which is borne by the primary exporters, mining and agriculture.
    -=-=-=-=-=-

    Lastly, the IPA’s John Roskam recently wrote a piece on the same issue, available here: http://ipa.org.au/news/2238/business-asked-for-this .

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  4. Great stuff Dan. Yes, we should be running our economy more like the Americans. How’s that working out for everyone over there? In case you didn’t know, Australia is a working man’s paradise. We’d like to keep it that way in spite of your bleating.

    W. David Porter
    November 17, 2010
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  5. There are few people on this planet I loathe more than Wayne Swan. It’s a pity, I know his family and they are nice folks. But his torrid little communist nationalisation by stealth ambitios and finger-pointing blatherings are a massive threat to Australia’s future prosperity.

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  6. I like people talking about Rex Connor. Ticket in the meat tray for that one. If we must have lunatics make ’em all colourful for our entertainment. We’ll need another Khemlani too soon, I can just see Rudd taking bags from him in colourful foreign back alleys. A bit heavy those bags though now that USD paper isn’t what it used to be though. Where is the decent cartoonist when you need one?

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  7. What do you reckon about the latest attempt to ensure more cheap credit for Oz Ross? :

    http://www.theaustralian.com.au/business/industry-sectors/new-bank-bonds-to-cut-rates-pressure/story-e6frg96f-1225954069785

    One could be a bit PO’ed if one was a bank depositor I reckon. Our pollies sure do love the apparently easy road to prosperity and popularity.

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  8. Now, just for a mint, Ned, drop yer plans to acquire a dozen Brizzy rentals when it all goes pear-shaped… and consider that the NH / SH paradigm is a little crazy. Here we pays twice as much in interest in a _very secure_ property market, as they do in failing economies all over usPIGsville.

    Even the heavy bears are planning to expend their readies on Oz property, imminently. (Check that out, son. P*ssed-to-the-gills, my spelling conscience has not deserted me.) If you can find Hardys Limited Cellar Release 2005, Batch 4505, at $13.50, I recommend you immediately corner the market and _buy it all_… as I just have. This is a fifty dollar wine!
    Nothing Hardys ever produced has ever impressed me, but this is quite exceptional. I see they’ve just taken out the No. 1 Shiraz against 580 others, globally. As a West Aussie, I’m distressed by a South Aussie wine beating us, but I’ll drown my sorrows. :D

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  9. “I’m distressed by a South Aussie wine beating us” – We’ve got to pretend SA is still good at something other than providing housing to the NT’s indigenous refugees?; Just to keep their hopes up hey! ;)

    No chance of Ned cellaring such stock long enough to make a profit – Demand and turnover is simply too high here I’m afraid?

    PS: Congrats on the missus and the house design thing!

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  10. Mate, this is seriously good wine!~ Don’t cellar it… drink it!~
    Nothing else compares at the price. I suspect that it’s peaking at five years*, so mine won’t last beyond March ’11.

    Here I sit, surrounded by a coupla hundred great WA wineries… and I’m actually spruiking for a SA wine. Can’t believe it myself.

    Doubt it? Buy a bottle. Next day you’ll be back for every bottle they’ve got.

    * Still have a lot of wine 20+ years, but this stuff is perfect now.
    It simply cannot improve… . :D

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  11. Given that sort of recommendation ,I’ve bookmarked the page for future (and potentially somewhat more sober?) reflection.

    “Here I sit” – While I reckon it wasn’t actually Humpty Dumpty who started off his yarn with that same line, I do recall it just might have been one of the world’s other great poets? :D

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  12. I am glad you are praising our wines Biker, bad-mouth them and you will end up in a barrel in the ANZ :)

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  13. Ned, we’re only talking who gets first dibs in insolvency. The main one is that the tax man gets kicked off the no.1 perch. The ABA lobbyists will be running around the halls saying heck if it all goes belly up on the bond holders you have to bail them out anyway or they’ll nuke your country like they threatened to do to Dubai so what difference does it make except cheaper funding. In effect its a back door sovereign guarantee.

    For the depositors its a real beauty. Not only do you lose all your cash when their balance sheet extend and pretends is brought to its inevitable ends but you get to lose it first before they start selling up all the real estate and Ralph Norris’s golf clubs in the liquidation.

    Bring back capital calls I reckon and then maybe even the muggles running the socialist super funds might wake up to pricing in bank board risk taking. When you see this stuff it might remind you of zionist crony captured Gillard’s ingenious carbon pricing solution but we but we only read it as :

    d-e-s-p-e-r-a-t-i-o-n

    And for biker, did you buy that red at a national chain store? I’m running short of quaffers and might be able to go that price if I can get my girlfriend to give up chocolate.

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  14. “For the depositors its a real beauty. Not only do you lose all your cash when their balance sheet extend and pretends is brought to its inevitable ends but you get to lose it first” – Thanks Ross. Yes, I figured it sounded like a considerable step down from the current deposit guarantee. :(

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  15. It Snowtown I’ll be visiting soon, Don!~ :D

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  16. Ross: “…did you buy that red at a national chain store? I’m running short of quaffers…”

    Liquorland, Ross. If you serve it at a blind tasting, no-one will pick it as a quaffer. They might pick it as South Australian, but their calls will all be in the $30 – $80 range.

    Hardys Limited Cellar Release Shiraz 2005, Batch 4505, discounted to $13.50.
    If you’re quick you may get a case. I skyped every distributor here. :D

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  17. They’ve got a crap website biker and they say that specials are store by store and don’t list Hardies on their main shiraz list. Even though there isn’t one on my regular track I might be able to drop in at one later this week because a bargain is a bargain (I’m not a Hardies follower normally either). Wish me luck.

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  18. Their online catalogue showed this on special at…. wait for it… two for $20. They won’t honour that, now… . But they did drop the price from $14.95 to $13.50, by the carton.

    If you type the exact descriptor in, you’ll see the actual bottle (cream label, perforations top and bottom) online.

    Also note that a Hardys shiraz took out top honours globally, recently. Wonders will never cease!~

    Good luck, Ross!~

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