Why BHP’s share price was down after the results

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Aug. 27 2014, Updated 8:00 a.m. ET

BHP’s share price

BHP’s share price was down ~4% after the results were announced in its Australia and London listings. In this part, we’ll talk about the key reasons that led to the decline.

Lack of capital management

BHP’s CEO said that the company will consider returning cash to the shareholders when the net debt comes below $25 billion. The company was close to that target with a net debt figure of $25.8 billion. However, it still didn’t announce any capital management measures.

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BHP also announced that the newly formed company will have minimal net debt. If it had handled part of the net debt, BHP’s target would have been achieved. This would have triggered a buy-back. However, BHP didn’t do anything when market was expecting a buy-back of $3 billion. As a result, investors were disappointed.

Demerger blues

BHP is holding all the shareholders equally as far as owning NewCo shares is concerned. However, there will be some Plc shareholders who won’t be allowed to hold shares in the newly listed company because of investment restrictions overseas. In our view, this also led to shareholders listed in London being disappointed.

In the falling commodity price environment, spinning off the non-core assets is a choice for the mining companies like BHP Billiton (BHP) and its peers Rio Tinto (RIO), Vale SA (VALE), and Cliffs Natural Resources (CLF). Exchange-traded funds (or ETFs) like the SPDR S&P Metals & Mining ETF (XME) also provide exposure to the metals and mining sector.

In the next part of this series, we’ll discuss the new company’s formation through the demerger. We’ll look at its structure, management, and assets.

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