BHP - BHP Group

[JohnDe]

and dependent on commodity prices.

BHP wins and losses are accentuated by sheer size. Three great wins
- Bass Strait with Esso
- Pilbara iron ore
- Escondido copper
outweigh the poor decisions, from which they exit / extricate.... eventually

Founded 1886, they're doing something right.
First bought in 1984, love the dividends.

EDIT ... thought I read right

Yes, Australia’s industrial relation laws will be watched closely by the likes of BHP. They are a business not a charity, competing against countries like Indonesia. The next year or two will be a tough test for the Labor government and their Union bosses.

 

[Value Hunter]

Kloppers was a bit to ambitious for growth, but I think McKenzie and the current guy have been doing good.

saying that if you held it for the past 30 years you have done very well, something like 20% compounded growth including dividends.

Sure BHP has done well overall in spite of themselves due to the tailwinds.

Since the year 2000 we have had a massive commodity bull market. And we know that miners in theory (often not the case in real life sadly) should have good operating leverage to higher prices.

Iron Ore prices have more than quadrupled since the year 2000 which is a massive tailwind. Hypothetically speaking for example if when the Iron Ore price was U.S. $20 per tonne in the early 2000s and a low cost miner was mining for U.S. $10 per tonne then the profit margin would have been for example U.S. $10 per tonne. Fast forward to today if a miner is well managed that cost of production might have increased for example from $10 to $40 U.S. per tonne due to 20 years of inflation plus the need to dig deeper into the ground (or dig lower grade ore, etc). So if today the Iron Ore price is U.S. $120 per tonne then the profit margin per tonne is now for example U.S. $80 per tonne. Therefore the profit margin has gone for example from U.S. $10 per tonne to U.S. $80 per tonne. An 8 fold increase in profit per tonne off the back of a four fold price increase. Now add to the fact that volumes of Iron Ore shipped exploded due to demand explosion. If you look at a graph from the year 2000 until now the volume of Iron Ore shipped from Australia has gone up something like 100 fold! I mean obviously increasing output requires investment/capex (and also some of the increase came from up and coming players like Fortescue etc) so you cannot expect it to translate to 100 fold profit increase but still the increase should have been a lot more than what it has been!

Basically if BHP did not have poor capital management for the past 30 years the share price should be over $200 by now! They literally experienced the biggest tailwinds you could have possibly hoped for and they didn't properly take advantage of it. They diversified into a lot of different commodities often overpaying for takeovers and buying those companies when that commodity was at the peak of its price cycle and then writing down the asset value by billions a few years later. From the year 2000 until now if they had not made any of those dumb acquisitions and had not paid dividends and instead just funneled all the excess free cash flow into share buybacks the stock price would likey be over $200 per share by now.

The main point being that sure BHP has done well but it should have done a lot better given the enormity of the tailwinds it recieved.

 

[Value Hunter]

Sure BHP has done well overall in spite of themselves due to the tailwinds.

Since the year 2000 we have had a massive commodity bull market. And we know that miners in theory (often not the case in real life sadly) should have good operating leverage to higher prices.

Iron Ore prices have more than quadrupled since the year 2000 which is a massive tailwind. Hypothetically speaking for example if when the Iron Ore price was U.S. $20 per tonne in the early 2000s and a low cost miner was mining for U.S. $10 per tonne then the profit margin would have been for example U.S. $10 per tonne. Fast forward to today if a miner is well managed that cost of production might have increased for example from $10 to $40 U.S. per tonne due to 20 years of inflation plus the need to dig deeper into the ground (or dig lower grade ore, etc). So if today the Iron Ore price is U.S. $120 per tonne then the profit margin per tonne is now for example U.S. $80 per tonne. Therefore the profit margin has gone for example from U.S. $10 per tonne to U.S. $80 per tonne. An 8 fold increase in profit per tonne off the back of a four fold price increase. Now add to the fact that volumes of Iron Ore shipped exploded due to demand explosion. If you look at a graph from the year 2000 until now the volume of Iron Ore shipped from Australia has gone up something like 100 fold! I mean obviously increasing output requires investment/capex (and also some of the increase came from up and coming players like Fortescue etc) so you cannot expect it to translate to 100 fold profit increase but still the increase should have been a lot more than what it has been!

Basically if BHP did not have poor capital management for the past 30 years the share price should be over $200 by now! They literally experienced the biggest tailwinds you could have possibly hoped for and they didn't properly take advantage of it. They diversified into a lot of different commodities often overpaying for takeovers and buying those companies when that commodity was at the peak of its price cycle and then writing down the asset value by billions a few years later. From the year 2000 until now if they had not made any of those dumb acquisitions and had not paid dividends and instead just funneled all the excess free cash flow into share buybacks the stock price would likey be over $200 per share by now.

The main point being that sure BHP has done well but it should have done a lot better given the enormity of the tailwinds it recieved.

What I am saying is not just theoretical. The comparison of the share price graph of Fortescue metals (managed by one of the greatest Australian businessmen of the past 30 years) and BHP since the year 2000 until now shows the difference between two companies operating in the same industry with one having excellent management and the other having crappy management.

Fortescue's share price has increased over 55 fold since 2005. Since 2005 BHP's share price has tripled. Obviously a smaller company has more upside during a boom if it gets things right but that level of disparity in results shows the difference in management quality.

 

[Value Hunter]

I would also just add in general its my personal observation that over time the quality of management of the typical large corporation has deteriorated markedly. I personally attribute it to a range of factors but I think its a symptom of late stage capitalism and the decline of western civilization more generally.

90% of the time when I look at a large corporation I think to myself "I could run that company better than the current clowns". In general the cases where I look at a company and am impressed by the management 90% of the time they are founders/owner operators because they have a genuine incentive to perform and take a long-term view. They have skin in the game. Professional management are ******* useless 90% of the time. I agree with Nassim Nicholas Taleb on this issue when he said "Practically, any CEO who "rose through the ranks" is competent at being an actor. No exception. Entrepreneur or nothing."

 

[Value Collector]

Sure BHP has done well overall in spite of themselves due to the tailwinds.

Since the year 2000 we have had a massive commodity bull market. And we know that miners in theory (often not the case in real life sadly) should have good operating leverage to higher prices.

Iron Ore prices have more than quadrupled since the year 2000 which is a massive tailwind. Hypothetically speaking for example if when the Iron Ore price was U.S. $20 per tonne in the early 2000s and a low cost miner was mining for U.S. $10 per tonne then the profit margin would have been for example U.S. $10 per tonne. Fast forward to today if a miner is well managed that cost of production might have increased for example from $10 to $40 U.S. per tonne due to 20 years of inflation plus the need to dig deeper into the ground (or dig lower grade ore, etc). So if today the Iron Ore price is U.S. $120 per tonne then the profit margin per tonne is now for example U.S. $80 per tonne. Therefore the profit margin has gone for example from U.S. $10 per tonne to U.S. $80 per tonne. An 8 fold increase in profit per tonne off the back of a four fold price increase. Now add to the fact that volumes of Iron Ore shipped exploded due to demand explosion. If you look at a graph from the year 2000 until now the volume of Iron Ore shipped from Australia has gone up something like 100 fold! I mean obviously increasing output requires investment/capex (and also some of the increase came from up and coming players like Fortescue etc) so you cannot expect it to translate to 100 fold profit increase but still the increase should have been a lot more than what it has been!

Basically if BHP did not have poor capital management for the past 30 years the share price should be over $200 by now! They literally experienced the biggest tailwinds you could have possibly hoped for and they didn't properly take advantage of it. They diversified into a lot of different commodities often overpaying for takeovers and buying those companies when that commodity was at the peak of its price cycle and then writing down the asset value by billions a few years later. From the year 2000 until now if they had not made any of those dumb acquisitions and had not paid dividends and instead just funneled all the excess free cash flow into share buybacks the stock price would likey be over $200 per share by now.

The main point being that sure BHP has done well but it should have done a lot better given the enormity of the tailwinds it recieved.

They have have made some mistakes with capital allocation, but they have also been pretty disciplined a lot of the time too.

I mean would Woolies have been better of if they didn’t lose $5 Billion on trying their hand creating Masters… of course, but some things are worth a shot.

Also, if you believe that BHP has been mismanaged but has still provided a 20% return to share holders for 24 years, that proves the underlying business must be pretty good, Buffett once said “I like businesses that are so strong a guy with dementia can run it” and he actually had a dementia victim running one of his businesses for a couple of years

 

[Value Collector]

What I am saying is not just theoretical. The comparison of the share price graph of Fortescue metals (managed by one of the greatest Australian businessmen of the past 30 years) and BHP since the year 2000 until now shows the difference between two companies operating in the same industry with one having excellent management and the other having crappy management.

Fortescue's share price has increased over 55 fold since 2005. Since 2005 BHP's share price has tripled. Obviously a smaller company has more upside during a boom if it gets things right but that level of disparity in results shows the difference in management quality.

Fortescue started with next to nothing though, and used huge leverage.

using your argument here I am a better investor than Buffett, because since 2000 I have grown my portfolio faster that Berkshire Hathaway has grown theirs.

 

[Value Hunter]

They have have made some mistakes with capital allocation, but they have also been pretty disciplined a lot of the time too.

I mean would Woolies have been better of if they didn’t lose $5 Billion on trying their hand creating Masters… of course, but some things are worth a shot.

Also, if you believe that BHP has been mismanaged but has still provided a 20% return to share holders for 24 years, that proves the underlying business must be pretty good, Buffett once said “I like businesses that are so strong a guy with dementia can run it” and he actually had a dementia victim running one of his businesses for a couple of years

I agree the underlying BHP business is excellent. Hence why the good returns in spit of being managed by muppets. Peter Lynch said the same thing basically.

Peter Lynch once said ‘Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it.’​

I agree with the sentiment an idiot proof business is a definite advantage.

 

[Value Hunter]

Fortescue started with next to nothing though, and used huge leverage.

using your argument here I am a better investor than Buffett, because since 2000 I have grown my portfolio faster that Berkshire Hathaway has grown theirs.

Yes Fortescue started with next to nothing but that is why I deliberately used 2005 as a starting point for return comparisons as they were a decent sized company by then, I could have used the year 2000 when they were $0.01 as a starting point but I did not as it was an unreasonable comparison.

 

[Value Hunter]

They have have made some mistakes with capital allocation, but they have also been pretty disciplined a lot of the time too.

I mean would Woolies have been better of if they didn’t lose $5 Billion on trying their hand creating Masters… of course, but some things are worth a shot.

Also, if you believe that BHP has been mismanaged but has still provided a 20% return to share holders for 24 years, that proves the underlying business must be pretty good, Buffett once said “I like businesses that are so strong a guy with dementia can run it” and he actually had a dementia victim running one of his businesses for a couple of years

I have many years under my belt working in retail and on day one of Bunnings trying to go into the U.K. I predicted their failure and pretty early on with Woolworths and the Masters venture I thought is was likely to fail.

 

[Value Hunter]

They have have made some mistakes with capital allocation, but they have also been pretty disciplined a lot of the time too.

I mean would Woolies have been better of if they didn’t lose $5 Billion on trying their hand creating Masters… of course, but some things are worth a shot.

Also, if you believe that BHP has been mismanaged but has still provided a 20% return to share holders for 24 years, that proves the underlying business must be pretty good, Buffett once said “I like businesses that are so strong a guy with dementia can run it” and he actually had a dementia victim running one of his businesses for a couple of years

To say that BHP made some mistakes with capital allocation is the understatement of the year!

 

[Value Hunter]

Fortescue started with next to nothing though, and used huge leverage.

using your argument here I am a better investor than Buffett, because since 2000 I have grown my portfolio faster that Berkshire Hathaway has grown theirs.

Also I was never expecting BHP to match the returns of Fortescue due to its size. Thats why I explained if BHP had done things right the share price could be $200. I said $200 and not $2000 for a reason.

You have not refuted my basic argument. Do you agree that in general BHP has been mismanaged over time? If you were the CEO and controlling shareholder of BHP for the last 20 years do you think you could have gotten better results?

It comes back to Charlie Mungers point that he made a lot of the out-performance he achieved was not due to brilliance but rather the avoidance of idiotic mistakes. I would posit that a lot of reasonably intelligent members of this forum could have managed BHP better not due to superior technical/mining knowledge or managerial brilliance but simply due to avoiding idiotic mistakes.

 

[Value Collector]

Yes Fortescue started with next to nothing but that is why I deliberately used 2005 as a starting point for return comparisons as they were a decent sized company by then, I could have used the year 2000 when they were $0.01 as a starting point but I did not as it was an unreasonable comparison.

In 2005 they hadn’t even produced a single tonne of ore to market.

 

[Value Collector]

I have many years under my belt working in retail and on day one of Bunnings trying to go into the U.K. I predicted their failure and pretty early on with Woolworths and the Masters venture I thought is was likely to fail.

What were your thoughts on FMG at the time, it was pretty common thought they would fail too.

 

[Value Collector]

Also I was never expecting BHP to match the returns of Fortescue due to its size. Thats why I explained if BHP had done things right the share price could be $200. I said $200 and not $2000 for a reason.

You have not refuted my basic argument. Do you agree that in general BHP has been mismanaged over time? If you were the CEO and controlling shareholder of BHP for the last 20 years do you think you could have gotten better results?

It comes back to Charlie Mungers point that he made a lot of the out-performance he achieved was not due to brilliance but rather the avoidance of idiotic mistakes. I would posit that a lot of reasonably intelligent members of this forum could have managed BHP better not due to superior technical/mining knowledge or managerial brilliance but simply due to avoiding idiotic mistakes.

At the time I might have been a bit wet behind the ears, because I was on board with the Kloppers growth projects.

 

[Value Collector]

To say that BHP made some mistakes with capital allocation is the understatement of the year!

What were their worst mistakes in your opinion?

 

[Value Hunter]

What were your thoughts on FMG at the time, it was pretty common thought they would fail too.

I thought it had a high chance of failure at the time also to be honest.

 

[Value Hunter]

What were their worst mistakes in your opinion?

That could be a whole thread in and of itself!

Their move into shale oil when the oil market was booming and they overpaid for shale oil assets and then wrote them down. Their move into nickel was terrible timing also. They overpaid for Potash assets. They overpaid for Oz Minerals (decent business but they just paid too much for it). In fact I would spin the question on its head and ask you to name some acquisitions they made int he last 20 years that were good? They were on the Cusp of overpaying for Rio Tinto in 2008 before walking away (and paying Rio Tinto a penalty of over $1 billion to walk away from the deal that they never should have contemplated in the first place).

 

[Value Collector]

That could be a whole thread in and of itself!

Their move into shale oil when the oil market was booming and they overpaid for shale oil assets and then wrote them down. Their move into nickel was terrible timing also. They overpaid for Potash assets. They overpaid for Oz Minerals (decent business but they just paid too much for it). In fact I would spin the question on its head and ask you to name some acquisitions they made int he last 20 years that were good? They were on the Cusp of overpaying for Rio Tinto in 2008 before walking away (and paying Rio Tinto a penalty of over $1 billion to walk away from the deal that they never should have contemplated in the first place).

I agree with some of those, The shale assets though would have been a big success if they just held them.

it’s not necessarily their acquisitions but their day to day capital spend that has been very good, Buying Rio would have given them a huge sand pit to continue playing this game in, oz minerals has extend this sand pit a bit.

 

[Value Collector]

I thought it had a high chance of failure at the time also to be honest.

There you go then, you couldn’t really tell the difference between Value destroying Masters and an asset that was going to return 100 times your money.

but that’s the thing with big ideas it’s worth risking a couple of billion for the chance at building a $100 Billion assets that throws off a couple of billion profit a year.

 

[Value Hunter]

If you want an example of good management vs bad management compare how Washington H. Soul Pattinson have managed their resources assets (including acquisitions and disposals) vs how BHP has managed acquisitions and disposals of other company's and resource assets. The key difference between the two is skin in the game with one being run by owner operators and the other (BHP) being run by typical muppets (hired professional management).

Rio Tinto has also made a lot of dumb acquisitons with Alcan being a prime example. Whereas you compare to for example Mineral Resources which made sensible acquisitions because its run by owner operator. It comes down to incentives. Management do not care about overpaying when they are using other people's money. Owner operators are not perfect but they make far fewer dumb decisions than professional management because they are writing the cheque with their own money.