Buyback speculation with record BHP profit tipped

BHP Billiton is expected to deliver the nation's biggest ever first-half profit this week, but the focus will be squarely on how much of its huge cashflows it returns to shareholders in the wake of rival Rio Tinto's $US5 billion buyback last week.

The mining giant is expected to declare on Wednesday it earned a mammoth $US10bn （$9.98bn） of underlying net profit in the six months to December 31, buoyed by rising iron ore, copper, coal and oil prices.

With the result not far from Rio's $US14bn full-year effort, analysts are divided over whether BHP will heed investor demands for a buyback that eclipses Rio's.

In November, BHP reactivated a $US4.2bn buyback of its London-listed shares.

With BHP having little debt on its balance sheet and showing little sign of a pending acquisition following the collapse of its $US40bn bid for Potash Corporation of Saskatchewan, many analysts and investors believe a big buyback of some sort will be announced this week.

"Following Rio's buyback there is now more focus on BHP's intentions. They have more available cash （and） it is just a question of how aggressive they will be," Pengana fund manager Tim Schroders said.

Expectations of a buyback are not unanimous.

Merrill Lynch analyst Peter O'Connor thinks BHP is set to announce it is keeping its cash in reserve for a potential takeover and future projects such as the multi-billion-dollar Olympic Dam copper and uranium mine expansion in South Australia.

"In our view, BHP will highlight that it is a growth company, that is spending on capex and mergers and acquisitions, as opposed to giving billions back in the form of a buyback （which is） an indirect acknowledgement that growth options are lacking," Mr O'Connor said.

He said the market could be underestimating BHP's capital spending requirements over the next five years, partly through a lack of transparency from the big miner on what and where it is spending and on yet-to-be-approved projects.

Since Canada blocked BHP's hostile bid for Canadian company Potash Corp, speculation has centred on it making a bid for US oil company Anadarko Petroleum, which has a market value of almost $US40bn.

Credit Suisse analyst Paul McTaggart said BHP might look at an off-market buyback of up to $US10bn of its Australian-listed shares.

"Limited merger and acquisition opportunities and its debt-free status mean we anticipate BHP Billiton to soon announce an off-market buy-back for its Ltd （Australian） shares to compliment and possibly extend the current on-market buyback target at Plc （London） shares," Mr McTaggart said.

The problem with an off-market buyback of Australian shares is that it would need to be at a 16 per cent discount and rely on tax incentives to encourage take-up because the London shares trade at a discount to the Australian stock.

Most off-market buybacks are done at 10 to 14 per cent discounts.

Deutsche Bank analyst Paul Young -- who forecast Rio's plans to deliver $US5bn in buybacks over two years -- also expects BHP Billiton to announce a $US5bn buyback.