By Jim Regan (Australia) and Clara Denina
SYDNEY/LONDON, Feb 24 (Reuters) - The world's largest miner
BHP Billiton BLT.L BHP.AX is sitting on an $11 billion cash
pile and what CEO Andrew Mackenzie does with the money will be a
critical test of his ability to invest during the industry's
worst downturn in decades.
Announcing plans this week to slash its dividend and shore
up its balance sheet, the mining giant said repeatedly that it
would consider "opportunities" - cranking up the rhetoric, even
as it warned of prolonged price pain.
One of a generation of conservative mining bosses brought in
after years of breakneck growth, former BP (L:BP) executive Mackenzie
is not an empire builder by nature. He has not done a single
major acquisition since he took the reins at BHP in 2013.
But with indebted miners Anglo American AAL.L and
Freeport-McMoRan FCX.N under unprecedented strain, bankers say
some of the world's most coveted copper mines could become
available - testing Mackenzie's deal-making mettle.
"It's not quite a war chest, but who knows what might come
under distress in this sort of environment," the BHP boss told
investors and analysts, when asked about the $11 billion.
Only a few deals and only one metal - copper - can expect to
meet BHP's tough requirements for an adequate return. Copper is
the most sought-after industrial metal, as existing mines age
and new ones are found in increasingly difficult locations.
But the buy-or-wait debate, say investors, bankers and
analysts, is gathering steam inside some of the industry's
largest players, who are already facing calls from some quarters
to make the best of a terrible market.
"This is exactly what BHP should be doing. Using their
strength of balance sheet to make bottom of cycle acquisitions
and during boom times pay out most of their earnings - rather
than buy and or invest at top of cycle," said Paul Xiradis,
chief investment officer of Australia-based Ausbil Investment
Management, which owns BHP stock.
The world's mining giants were heavily criticised in the
years after the 2008 financial crisis, accused of making ruinous
acquisitions and - worse - pursuing costly mine projects at the
top of the market, fuelling over-supply when the market could
least afford it.
But as the cycle hits bottom, steep spending cuts have left
BHP, a mining behemoth, pumping in enough cash to stay in
business but, some analysts argue, not enough to grow. That puts
the question of whether to wait or to buy firmly on the table:
is the time now, or is it a decade too soon?
"(BHP) have a strategic dilemma," one industry banker said.
FOR SALE
Anglo, Freeport and Glencore GLEN.L have all put assets on
the block as part of efforts to cut debt. For now, advisers say
none of those meets BHP or indeed chief rival Rio Tinto's
RIO.AX RIO.L requirements - some are not copper, others are
too small or in risky jurisdictions once seen as pioneering and
now frowned upon.
But if Anglo and Freeport fail to find buyers for what they
have got for sale now, bankers say better mines could come up.
More likely, according to industry advisers, the companies
will be reluctant to sell crown jewels and would put themselves
in play, alongside copper-heavy players like Lundin Mining
LUN.TO , or First Quantum FM.TO , already under the scanner.
All of this could be good news for BHP and even more so Rio,
which has its own $9 billion of cash and is facing calls to grow
in copper to diversify a portfolio dominated by iron ore.
Anglo and Freeport both have prize assets in Latin America -
for Anglo, Chile's Los Bronces, and for Freeport, Cerro Verde in
Peru and a majority stake in the El Abra mine in Chile.
For now, analysts say Mackenzie's comments could be aimed at
putting the acquisitions issue up for debate, well ahead of any
deal - real or potential. It is certainly a fair distance to any
actual deal, given the high price tags of recent acquisitions.
The last three significant deals - most recently, the
acquisition of an extra stake in Freeport's Morenci mine by
Japan's Sumitomo 5713.T - were done at an implied copper price
of well over $7,000 a tonne, bankers and analysts estimate,
compared to current prices of closer to $4,600 CMCU3 .
That could make any deal a stretch for BHP, which needs to
keep cagier investors on board and is also trying to assuage
rating agencies to keep its single A credit rating.
"I think frankly that BHP and Rio are still trigger shy. But
we are seeing them on the edges - they are starting to explore
whether this makes sense," a second industry banker said.
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GRAPHIC: Copper prices and projections http://tmsnrt.rs/20Uj27r
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(Reporting and writing by Clara Ferreira Marques in MUMBAI;
Additional reporting by Eric Onstad and Simon Jessop in LONDON;
Editing by Raju Gopalakrishnan)