BHP raising $6.5bn fresh sign of mining turnaround

Gearing up and turning around

Although investment bank permabears haven’t stopped issuing dire warnings on the outlook for the sector, the mining industry’s big players are themselves slowly beginning to change tack.

After 18 months of careful consideration Mick Davis appears to be close to pulling the trigger on a maiden investment for his  $5.6 billion X2 fund.

And that it’s in probably the most depressed corner of the commodities market – thermal coal – is also telling. If coal is primed for a recovery, what isn’t?

Much has been said about the lack of ambition at mining’s supermajors. As world number one and most diversified company the pullback at BHP Billiton has been startling.

BHP’s overall capex in its 2015 financial year fell to $10.4 billion below the 2013 peak. By 2017 it will shrink to less than a third of what it was. Exploration has been decimated and it only has four major projects in the works, compared to 18 mine and infrastructure developments two years ago.

Now it seems, BHP may be gearing up again.

News out yesterday showed  the Melbourne company’s bankers pull off one of the biggest bond offerings ever in the corporate sector.

BHP was able to raise $6.5 billion  “despite concerns about the current environment” and according to Reuters by adding a “commodity premium” bookrunners “were able to amass more than $13 billion in orders worldwide.”

The terms on the hybrid bonds (bonds with equity features and where execs can suspend interest payments for instance) were attractive to be sure, but $6.5 billion is also a very big number.

One investor told the newswire the capital raising seems to indicate that BHP already has its eye on something adding that “they’re probably the only company in the sector, apart from maybe Rio Tinto, that can afford to buy right now.”

It’s not as if there aren’t plenty to go around – Glencore, Anglo American, Peabody, Barrick, BP and Fortescue are all in disposal mode.

For its part Rio Tinto boss Sam Walsh told the Wall Street Journal that the company isn’t interested in making a bid for Glencore (oh the irony). But don’t rule it out completely. Walsh has always said he wants to make history.

Even if BHP decides to spend the cash on something boring and safe (Glencore’s share of their Antamina JV in Peru is a likely target) at least it shows investors are back to making big bets on metals and mining.

John Gravelle of PwC told in June:

“You need to get investors excited about the mining industry overall.  The money will flow into low risk companies first. There’s always going to be the investor that wants to get in early, but the junior market would only really start to benefit once majors have instilled investor confidence.”

Gravelle said this trickle down effect from majors to juniors could take a few years.

Perhaps it’s happening sooner than hoped.

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