Business | From Broken Hill to break up

BHP reconsiders its foray into US shale

The world’s biggest miner is under pressure to slim down

THE hills from which Broken Hill in New South Wales got their name no longer exist. They have been mined away since, 134 years ago, a sheep herder discovered what would become one of the world’s biggest silver mines. BHP, the world’s largest miner, whose name dates back to when it was called the Broken Hill Proprietary, is also under the pickaxe, wielded by feisty activists. This week its boss, Andrew Mackenzie, conceded that he is reconsidering its foray into American shale oil. Even in business meetings these days, he needs a hard hat.

On May 16th, shortly before he took to the stage at a prominent mining-industry shindig in Barcelona, Elliott, the activist fund in question, lobbed its second clod in less than two months. In a statement it accused the company of a “do-nothing” response to its previous missive demanding a full-scale overhaul of the group. Mischievously, it played on BHP’s “Think Big” rebranding effort launched a day earlier, challenging management to “Think Big” about its proposal.

Aspects of Elliott’s campaign are, in fact, banal and not worth much thought at all. It wants BHP to increase share buy-backs, which offer no boost to long-term growth prospects. It also cherry-picks time periods to give an exaggerated impression of how badly BHP’s shares have performed compared with its Anglo-Australian counterpart, Rio Tinto. Yet on two points, it has hit home: the company’s disastrous diversification into American shale oil; and its dual listing in London and Sydney.

On the first point, Mr Mackenzie has given ground. In answer to a question in Barcelona, he said the shale business, which BHP bought for $20bn in 2011, is not one where it intends further expansion. In fact, if there are any potential buyers for its assets, “we would be more than happy to talk turkey with them,” he said. Elliott is urging BHP to launch a review of its entire petroleum business in America, Australia and elsewhere. Eventually it wants them sold or spun off.

But Elliott has also softened. Partly in response to an angry reaction from the Australian government, it dropped its recommendation that BHP incorporates in London as part of efforts to simplify its dual-listing structure. It would now accept a sole Australian domicile. BHP thinks that is tricky, but analysts reckon it should give the matter more thought.

Ultimately, BHP’s greatest vulnerability has come from grafting a subpar oil business onto one of the world’s most successful mining firms. It argues that the combination helps smooth out the boom-bust cycle, because oil and metals should behave differently. Evidence from the recent slump suggests they have suffered more or less equally, though.

Another firm’s experience suggests separation may be better than combination. South32, a firm created from the demerger of some of BHP’s unfashionable mining assets in 2015, has gone from strength to strength. But shrinkage was not what Mr Mackenzie had in mind when launching the “Think Big” ad campaign. Not for nothing has The Australian, a newspaper, referred to the testy stand-off as “the Elliott in the room”.

This article appeared in the Business section of the print edition under the headline "From Broken Hill to break up"

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