Pretty good for Government work

(This ‘open letter’ below appeared in the New York Times. It was written by Warren E. Buffett,  named by Forbes as “the most successful investor all time”.)

Dear Uncle Sam,
My mother told me to send thank-you notes promptly. I’ve been remiss.
Let me remind you why I’m writing. Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.

Many of our largest industrial companies, dependent on commercial paper financing that had disappeared, were weeks away from exhausting their cash resources. Indeed, all of corporate America’s dominoes were lined up, ready to topple at lightning speed. My own company, Berkshire Hathaway, might have been the last to fall, but that distinction provided little solace.

Nor was it just business that was in peril: 300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice. There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed.

Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm.

When the crisis struck, I felt you would understand the role you had to play. But you’ve never been known for speed, and in a meltdown minutes matter. I worried whether the barrage of shattering surprises would disorient you. You would have to improvise solutions on the run, stretch legal boundaries and avoid slowdowns, like Congressional hearings and studies. You would also need to get turf-conscious departments to work together in mounting your counterattack. The challenge was huge, and many people thought you were not up to it.

Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic — and, overall, your actions were remarkably effective.
I don’t know precisely how you orchestrated these. But I did have a pretty good seat as events unfolded, and I would like to commend a few of your troops. In the darkest of days, Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair grasped the gravity of the situation and acted with courage and dispatch. And though I never voted for George W. Bush, I give him great credit for leading, even as Congress postured and squabbled.

You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess — most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly.
That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world.
So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through — and the world would look far different now if you had not.

Your grateful nephew, Warren

BHP sees market value grow by more than $200 bn

Marius Kloppers, CEO from October 2007 of BHP Billiton, the world’s gest diversified resources group, took a fair amount of flak after dropping a $40-bn cash bid for PotashCorp, after the deal was blocked by the Canadian government. This was named as the third instance where Kloppers and BHP Billiton have been unable to deliver a deal; technically, that much is correct. The PotashCorp deal is only the second-ever blocking by the Canadian government of a foreign takeover. Prior to this, there was a proposed iron ore joint venture in Australia, which was kyboshed by various regulators around the world. Prior to that, a mooted merger with the world’s third gest miner fell over during the market panic that enveloped much of the world during, and after, 2008.

It is sometimes said that nothing succeeds like success; in this story, it seems that investors would somehow prefer emphasis on “nothing”. Early in 2001, which can be marked off as the start of the so-called commodities supercycle (characterised by the start of the dollar bear market (still in place), and an ongoing explosion in China’s raw materials consumption (still in place)), Alcoa ranked as the gest mining stock in the world, by market value, at $30 bn.

BHP Billiton ranked second, at some $25 bn. Today, Alcoa ranks as No 40 in terms of market value, at $13 bn; BHP Billiton is at No 1, with $229 bn. In just under six years, the market value of BHP Billiton has grown by more than $200 bn. Does this give investors open licence to treat BHP Billiton as something that could have improved on adding more than $200 bn in value?

Indeed, BHP Billiton has done just that. Since 2005, the company has paid a total of $17.9 bn in cash dividends, and spent $13.3 bn cash on stock buybacks, for a cash return total of $31.3 bn. Kloppers often reminds that BHP Billiton is in the Tier I category, and intends to stay there. Tier I assets rarely come onto the market. So far this decade, since BHP Billiton was formed, the gest group acquisition ranks as the USD 7.2bn cash take out of Australia’s WMC in 2005, mainly for Olympic Dam, which ranks as the world’s No 4 copper, No 4 gold, and No 1 uranium, deposit.

In September 2008, there was the largely unnoticed acquisition, where BHP Billiton invested $1 bn, by the BHP Billiton Mitsubishi Alliance, in acquiring the New Saraji coking coal exploration project from Australia’s New Hope.
In early June 2009, Rio Tinto and BHP Billiton announced that it would pay Rio Tinto $5.8 bn “for equity type interests at financial close” to take its interest in the two companies’ proposed Pilbara, Australia iron ore joint venture from 45% to 50%. This valued the full joint venture (which has now been annihilated by various competition and other authorities) at $116 bn, more than the market value of any mining company in the world, barring BHP Billiton, Vale (the Brazilian supergroup), and Rio Tinto.

The proposed joint venture followed BHP Billiton’s earlier bid to merge with Rio Tinto as a whole. BHP Billiton most recently decided to leapfrog its potash ambitions. In June 2006, the group struck a joint venture agreement with Anglo Potash, giving BHP Billiton a 75% interest in a large land position in Saskatchewan (the home, of course, of PotashCorp). In July 2008, BHP Billiton acquired Anglo Potash for cash of $270 m. All told, BHP Billiton currently holds exploration rights to a total of more than 14,000 square km of prospective ground in the Saskatchewan potash basin.
Were BHP Billiton a member of the well known 30-member Dow Jones Industrial Index, its market value would be second only to Exxon Mobil. BHP Billiton today ranks as one of the most valuable stocks in the world. As custodian of some of the world’s finest resources assets, forging further into fields of success poses an increasingly daunting task, given the well known disease of investor amnesia. Investors are one group of campers that simply cannot be given enough. 

(This report by Barry Sergeant was
distributed in a fuller form by  Mineweb.)

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