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Companies
Rio & BHP riding the wave of investor backing
Nicholas Way - June 2007
It would be a brave funds manager to tip mining giants BHP Billiton and Rio Tinto out of his or her portfolio right now. The key fundamental that has seen their share prices treble in the past four years – a booming Chinese economy – is still in place. Indeed, it’s now being complemented by a surging economy in the world’s second most populous nation – India.
It’s not just the global economy that is working in their favour. Both companies have strong management – the announcement that Marius Kloppers was stepping into Chip Goodyear’s shoes as CEO was as seamless a transition as investors could wish for – good exploration teams and productive workforces.
It’s little wonder that BHP’s latest interim result to December 31 2006 showed a 41% increase in the attributable profit to $US6.2 billion – the seventh consecutive record half-year result – on the back of strong demand for its commodities, high prices and solid production. For the full year to June 30 2007 Bell Potter Securities predicts a $US13.1 billion profit – a 25% gain compared with 2006. The Big Australian’s self-inflicted operational woes of the 1990s are a distant memory.
It was little different at Rio for the full year to December 31 2006; net earnings rose 36% to $US7.4 billion, underpinned by record production volumes for several commodities, including iron ore, alumina, US coal and molybdenum. Shareholders weren’t forgotten with the full-year ordinary dividend up 30% to $US1.04 cents. In this 12 months to December 31 2007, Bell Potter Securities has net earnings rising 14% to $US8.4 billion.
A strong profit wasn’t the only thing Rio had in common with its big brother; the announcement late last year that Tom Albanese was replacing Leigh Clifford as chief executive officer in May 2007 was just as seamless.
But mining booms – and, make no mistake, this is the mother of all mining booms – always end, and when it happens the share prices of BHP and Rio will not be immune. But this time around falling commodity prices could be compounded by a heightened awareness about environmental issues – particularly as it relates to two miners with vast coal-mining operations.
No doubt those analysts pushing the “buy” recommendations for BHP and Rio would argue environmental issues are factored into the share price; and they could be right. Certainly both companies are acutely aware of the sensitivities – political and commercial – that surround the issue.
Rio hasn’t joined forces with the oil giant BP to begin feasibility studies into a $2 billion “clean” coal-fired power station at Kwinana in Western Australia because it’s suddenly gone “all warm and fuzzy” on the environment. Nor have similar sentiments governed BHP’s decision to launch a mooted eight-figure “green” research fund that’s part of its measured response to climate change.
But the problem for BHP and Rio is just how quickly environmental issues can move. There’s no better evidence for this than just how far Prime Minister John Howard has come on the issue; virtually overnight he has gone from being “climate change sceptic” to a “climate change realist”. The politics of the environment will be front and centre at the next election.
It’s not just politicians changing – sorry, clarifying – their views in a response to heightened public concern. (Many factors are influencing public thinking but the release of the Stern report, which analysed the effect of climate change and global warming on the world economy, has been a seminal event.)
Institutional investors, too, are reacting to the issue. The UN Principles of Responsible Investment (PRI), which wants companies to provide extra information on Environmental, Social and Governance (ESG) issues, is touching a raw nerve among funds globally. In the last year alone, nearly 200 institutions controlling assets worth $US8 billion signed on to the PRI charter. Others will follow.
At the same time broking analysts are being asked to look beyond the profit-and-loss statements and the balance sheets to see how companies measure up on issues such as their social responsibilities, corporate governance and the environment. The financial fundamentals are still paramount, but “the times they are a-changing” – and quickly.
BHP and Rio know better than anyone their need to keep the institutional investors onside. Increasingly, they will have to convince them they are adapting to this changing world and effectively communicate this message to shareholders.
If they can achieve this then climate change could prove a strong positive for both companies. If investors mark down companies perceived to be only paying lip service to these issues, then the converse will be a tick for those companies seen to be doing the right thing. The issue for BHP and Rio is that politics of the environment are moving so quickly that what’s perceived as the right policy today could be wrong tomorrow. Just ask John Howard.
Whatever your views, you can discuss this article - or any of Nicholas's articles - on our message board Your 2 Cents.
Nicholas Way is a former senior journalist at Business Review Weekly (BRW), who writes investigative pieces on Australian listed companies.
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