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(The opinions expressed here are those of the author, acolumnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, July 31 (Reuters) - Two recent dealsby the world's two biggest mining companies both looked positivefor shareholders, but also underscore the challenges facingmajor commodity producers.
BHP Billiton last week agreed to sell its U.S.shale oil and gas assets for $10.5 billion, while Rio Tintoappears on track to exit its troubled investment in thegiant Grasberg copper and gold mine in Indonesia for about $3.5billion.
Both deals were generally well-received by investors,largely because they resolve long-running sores for the mininggiants and will likely result in a return of the proceeds toshareholders.
BHP Chief Executive Andrew Mackenzie has said the proceedsof the sale of the U.S. shale assets will be returned toshareholders, but hasn't yet given details of how and when.
Rio Tinto has been cautious over the announced agreement tosell its Indonesian unit to the state-owned miner PT Inalum,which would effectively mean selling its 40 percent interest inGrasberg, which is operated by Freeport-McMoRan Inc.
However, the chances are good that at least some of theproceeds, should the deal be finalised, will wind up in thehands of shareholders.
While investors are usually pleased to get their hands on apile of cash, the fact that BHP intends to hand over the cashand Rio Tinto may do the same illustrates that there really arevery few suitable investment opportunities.
Mining companies were heavily criticised for over-investingin the last boom period, which ended in 2011 and was followed byfive years of declining prices for most major commodities, suchas iron ore and coal.
This resulted in the companies turning their focus tooperational efficiencies and boosting returns to shareholders, ashift that is still the current mantra most often heard from topmining executives.
But while this was a necessary change in mindset, it is alsoa strategy that's unlikely to work in the long term.
BHP retains offshore crude oil assets in the United States,and its interest in liquefied natural gas in Australia.
But the sale of the shale oil and gas assets, mainly to BPPlc, is an effective retreat from a business that hastransformed the global energy landscape.
Exiting shale also came at a substantial overall price forBHP, given the assets cost about $20 billion when purchased in2011 and have been written down in value several times sincethen.
Handing the money back to shareholders through boosteddividends or a share buyback will provide investors with a sugarhit, but do little to enhance the long-term value of BHP.
DIVERSIFICATION STRUGGLES
BHP's biggest division is its Western Australia iron ore,and the company remains heavily exposed to the fortunes of theChinese steel sector, the buyer of two-thirds of the world'sseaborne iron ore supplies.
Rio Tinto is even more exposed to iron ore, with itsoperations in Western Australia accounting for about 70 percentof its earnings.
Both BHP and Rio Tinto have struggled to diversify away fromiron ore, and both have made costly and unsuccessfulacquisitions in the past 20 years.
BHP's massive Olympic Dam copper, gold and uranium mine inSouth Australia has had problems ramping up production, whilesimilar issues have impacted Rio Tinto's Oyu Tolgoi copper minein Mongolia.
These assets are good enough to be worth investing time,money and effort to get them working efficiently, but thedifficulties both companies have encountered show there areprobably no easy major projects left in the world.
This poses the question: What next for BHP, Rio Tinto andother major miners such as Anglo American and Brazil'sVale ?
They run the risk of being companies that can return cash toshareholders in the good times, but will lag when commodityprices go through the inevitable cyclical downturns.
While it would be foolish to advocate the companies jumpingheadlong into new mining areas such as battery metals likelithium and cobalt, it's likely that eventually investors willdemand more from the top resource companies.
Disclosure: At the time of publication, Clyde Russell ownedshares in BHP and Rio Tinto as an investor in a fund.(Editing by Eric Meijer)
