New York vulture fund tos, fros and backflips on BHP advice

The plan by New York-based vulture fund Elliott Management Corporation to force BHP out of Australia and into listing solely on the UK and US markets has been abandoned and recast after the secretive group fluffed its opening arguments badly.

Now, Elliott is faffing on about costs and how BHP has to attack those — oblivious to the cost-cutting in iron ore and coal (its two most important commodities), that has helped turn the once booming iron ore town of Newman in WA and the central Queensland coal town of Moranbah into ghost towns full of empty houses and bad debt black holes for our banks.

And yet it is hard to find any acknowledgement in the Australian or foreign media about the collapse of the Elliott arguments, because the firm obviously had little to no understanding of what BHP has been doing, or why its current corporate structure and multiple listings were put in place. For that, you have to blame either laziness or incompetence, and yet a credulous Australian business media on the whole believed the rubbish Elliott used in its opening volley, and continues to do so with the latest claims about the need for cost cuts. Only Matthew Stevens in the Australian Financial Review has seen through the rubbishy arguments of Elliott and bagged them. Other media reports and analysis are the usual “he said, they said”, breathless winners and losers approach.

Elliott Advisers said in a statement dramatically released at midnight New York time (2pm Sydney time) that said now wants an independent review of the mining giant’s petroleum business and said it was now open to a unified company that would retain its full-share market listing in Australia and London. It claimed that, since 2008, Rio Tinto shareholders have enjoyed better returns than those of BHP, a highly selective comparison that ignored the fact that in 2008 Rio Tinto was close to collapse, weighed down by US$44 billion in debt taken on by the silliest deal in the mining boom: the purchase of Alcan in 2007, at high prices — a situation not mentioned by Elliott. Rio was later all but bailed out by Chinese group, Chinalco, which took a 9% stake in 2011 and supported Rio and the share price.

Elliott had been pushing originally for BHP to collapse its dual listings on the London and Australian sharemarkets, and move its domicile and primary listing to London, and spin out its North American oil and gas assets — moves that would have damaged its standing in Australia and slashed the value of income and share prices for the company’s vast shareholder base in this country. It seems Elliott had little or no understanding of the dividend imputation and franking credits system of taxation in Australia and the immense value of those to local shareholders (especially as the company’s most profitable business is its WA iron ore mines). If it had an understanding, it ignored them, a sign of its arrogance. Nor did it understand the strength of the conditions imposed on BHP by the then Howard-Costello government back in 2001 when it merged with Billiton of South Africa. Federal Treasurer Scott Morrison made it clear 10 days ago that the government would hold BHP to those undertakings if it tried to move its domicile and main listing out of Australia and would take legal action if necessary

Now Elliott has changed its proposal so that the miner’s incorporation would remain in Australia, and would remain Australian headquartered and an Australian tax resident, Elliott says, retaining full ASX and LSE listings, with ordinary shares listed on the ASX. And in its midnight statement, Elliott claimed the global miner’s investors wants a renewed focus on costs and that its recent meetings with local and overseas investors in BHP “reveals extremely broad and deep-rooted shareholder support for proactive steps to be taken by BHP management to review its petroleum business”.

And there was this beauty from Elliott: “Current management’s response to our Value Unlock Plan has been inflexible and defensive, showing instead that they prefer to do nothing new to improve performance and to optimise shareholder value from BHP’s first-class portfolio of assets.” That’s more gobbledygook about costs, and fails to mention how BHP has cut costs — ruthlessly in coal and especially in iron ore — damaging towns and lives regardless of the impact.

Those efforts have caused BHP’s costs per tonne of iron ore to drop from around US$29 a tonne to US$13 a tonne in the past four years. Copper and coal costs have also been slashed as well. Autonomous mining and processing technology is due to spread from the WA iron ore mines to BHP’s central Queensland mines from late this year onwards, a move that will cut costs sharply.

All this talk is from an investment group that brooks no examination of its own performance, uses the media shamelessly (it is currently running a nasty and toxic campaign against a Dutch company, Azko Nobel, which has refused to accede to Elliott’s demands (extortionate in nature) that Azko allow itself to be taken over by a US group, PPG. In this case there have been quite striking examples of Elliott advancing arguments similar to PPG). 

Because of its highly secretive approach to disclosure, there is no independent examination of Elliott’s real investment performance (not its sanitised version), its cost structures and its ability to use capital efficiently (the same applies to all hedge funds and private equity companies). There is no transparency and what data is published or reaches the public eye is released by Elliott without any independent verification, unlike the cases of BHP, Akzo Nobel, and other companies targeted by the group. And by the way, BHP has wasted close to A$30 billion buying mostly gas-producing assets in the US shale gas areas. But so have a host of other companies led by Exxon Mobil, which paid US$42 billion for one US shale gas company that has not delivered a real return for years.