BHP goes on $80 billion expansion spree

BHP Billiton (BHP.AX), the world’s biggest miner, plans to pour $80 billion into expansions over the next five years and return cash to investors rather than chase ambitious takeovers, after nearly doubling its first-half profit to a record.

The Anglo-Australian giant, flush with cash, said it would more than double its share buyback to $10 billion, to be completed in 2011, playing down the near term chances of a major acquisition.

“The biggest surprise is the commitment to spend $80 billion over the next five years,” said James Bruce, portfolio manager at Perpetual Investments, one of BHP’s top 10 Australian shareholders.

“We think that this demonstrates the challenges that the industry is having satisfying rising demand, while replacing declining production from mature operations,” he said.

BHP Chief Executive Marius Kloppers said the company’s acquisition sights remained focused on snaring very large assets, but there are not many of them available and its preference for now was to spend on expansions.

In light of the difficulties it faced on the three big deals it had to ditch over the past three years, including its $39 billion bid for top global fertilizer maker Potash Corp (POT.TO) last year, he said deals were getting too hard to accomplish.

“And in addition, where we currently stand in the commodity price cycle probably has increased price expectations for those assets,” Kloppers told analysts.

“And hence, our focus and some of my peers with other companies…is to emphasize that as one looks at a buy versus build equation, the clear opportunity for us is to continue to invest money in our organic portfolio.”

BHP forecast a strong outlook for commodities markets, due to tight supplies, but like its rival Rio Tinto (RIO.AX) (RIO.L), it warned that prices could be volatile.

“While we expect a slowdown in the growth rate of global commodity demand in calendar year 2011, the economic environment still underpins a robust near term outlook for our products,” Kloppers said.

He said industry analysts had long overestimated supplies, and he predicted that over the next one to two years supplies would remain tight, with few new large expansions or projects coming on line.

He confirmed he had been concerned about spying by the company’s biggest customer, China, as revealed in diplomatic cables released by WikiLeaks, but said with market-based prices now for iron ore, that should be less of a worry.

“One of the reasons we have pushed so hard for market-clearing prices is so that these sorts of things are not a concern,” Kloppers told reporters.