Hedge fund Elliott says BHP is a chronic underperformer

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Activist US hedge fund Elliott Associates has raised the stakes in its call for BHP to sell off assets and return capital to shareholders.

Elliott has directly criticised what it calls BHP’s “do nothing” management, saying shareholders want a halt to “chronic underperformance” of the miner and put an end to tax avoidance using a Singapore subsidiary.

The funds manager, a shareholder in BHP, claims management has been responsible for a number of significantly value-destructive initiatives, including:

  • $US23 billion lost through the ill-fated foray into the US onshore petroleum sector
  • $US8 billion on petroleum exploration activities with no apparent value created
  • $US9 billion in share buybacks made at inflated market prices

In analysis released today, Elliott says total shareholder returns at BHP have substantially underperformed Rio Tinto as well as the ASX200, the FTSE 100 and the S&P 500 over the year to date and for every year of the last eight years.

It says BHP’s total shareholder returns from November 2008 to date have been 128% lower than Rio Tinto, its nearest peer, as this chart shows:

Source: Elliott

Elliott last month began pushing the mining company to sell off oil assets assets and return capital to shareholders. It also proposes that BHP replace its dual Australia-UK listing with a single UK company, with a primary listing in London and with Chess Depository Instruments quoted on the ASX.

However, BHP says the costs and associated risks of Elliott’s proposal would “significantly outweigh any potential benefits”.

Elliott said today: “Current management’s response to the value unlock plan has been misconceived, wholly unconvincing and a disservice to BHP’s owners — underestimating the groundswell of dissatisfaction among shareholders.”

The funds manager has called for an open and independent review of BHP’s petroleum business.

Here’s how Elliott sees the destruction in value of BHP’s onshore oil assets in the US:

Source: Elliott

The fund manager today also took aim at BHP’s use of a Singapore marketing subsidiary to try to reduce tax liabilities in Australia, commonly known as a Singapore tax sling.

BHP is currently in dispute with the Australian Taxation Office (ATO) over the amount of tax in connection with sales of Australia-sourced commodities through the company’s entity in Singapore, BHP Billiton Marketing AG.

“This bespoke Singapore-based marketing structure by which BHP seeks to avoid tax is under heavy fire from the ATO, with BHP reportedly facing an ATO tax assessment of over $1 billion,” says Elliott.

“Our assessment is that the tax benefits and the aggressive marketing margins which BHP was seeking in using this structure are unsustainable.

“We ascribe no value to this structure, in contrast to management who appear to consider it to be worth $US300 million to $US500 million.”

Elliott wants to see the structure unwound to allay shareholder concerns.

“It would also be in line with BHP’s recent efforts to gain the trust of its various stakeholders,” says Elliott.

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