Putting Broken Hill Back Together

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SYDNEY -- The patient's had surgery. But will he recover?

Diversified resources giant

Broken Hill Proprietary

(

(BHP) - Get Report

BHP ADR), a corporate icon in Australia, remains in critical condition. The true awfulness of the company's health was revealed June 25, when financial results for the year ended May 31 were announced.

Slammed by weak commodity prices, beset by bad investments and steered by a caretaker chief executive, BHP suffered a huge loss of US$890 million for the year. The loss included a massive $1.86 billion write-down of assets, one of the biggest ever in Australia.

BHP's aim was to come clean with financial markets and prepare the way for a new, less clubby leadership with a tighter focus. The market's reaction was hardly friendly: BHP's American depositary receipts are down around 3% since the results were released, trading just above $16. Compare that to a peak of nearly $30 in July 1997. Clearly, one of Australia's most globally visible companies has been a bitter disappointment.

It's lost money on its acquisition of the wildly expensive

Magma

copper project in the U.S., for which it paid $2.4 billion in 1996 when copper prices were $1.31 per pound. A subsequent copper-market collapse has left copper prices gasping around 74 cents, and BHP this year wrote down the investment by $976 million.

BHP also took a $360 million write-down of its western Australia hot briquetted iron plant, a write-down of $218 million in its Zimbabwean platinum mine holdings and smaller write-downs in steel, coal, methanol and mineral-sands projects. Ouch!

While everyone expected a financial bloodletting to clear the decks at BHP, the markets have given the company only a qualified vote of confidence until a permanent executive occupies the big seat.

"BHP has taken some hard decisions," said Greg Matthews, an analyst with Australia's

Macquarie Bank

. "But the fact BHP doesn't have a managing director at the moment adds to uncertainty."

BHP's problems follow a period in which the company courted risk by throwing money at expensive investments in pursuit of aggressive growth. But can Broken Hill find its focus? Until it does, the wobbly giant faces the task of selling off pieces of an asset portfolio when commodity prices are poor and the queue of other distressed sellers -- particularly in Asia -- is rather long. Not a pretty picture.

And while this executive and strategic uncertainty coupled with weak commodity prices and a very weak Australian dollar might seem attractive for contrarians, it could equally be argued there's little reason to rush in when the story's only half-complete.

That's because acting Chief Executive

Ron McNeilly

says BHP still has a long way to go in reducing costs and lowering its debt-to-equity ratio of roughly 53% to somewhere between 40% to 45%, a level he feels more comfortable with.

That's going to put leg shackles on the company, as will prices for oil, natural gas, copper, platinum, coal, zinc and steel, the company's main commodity products, which are unlikely to show much improvement in the coming year, McNeilly says. Analysts generally agree.

And while the company hopes to appoint a new CEO by its Sept. 22 annual meeting, BHP's stock price may well languish long after that as the market attempts to value a "new" BHP, as well as see how it deals with the ongoing economic downturn in Asia.

Meanwhile, calls have gotten louder for an unlocking of BHP's assets, perhaps through the issue of letter stock (stock that reflects earnings within a specific sector of the company) or even an outright breakup. Naturally, a wobbly giant priced in Australian dollars hovering just above 12-year lows offers an alluring target for other global resource companies.

With interesting oil and gas assets in Australia, the U.S. and the North Sea, mineral operations in Australia, the U.S., Brazil, Canada and Zimbabwe, and various steel assets in Australia, an oil company like

Royal Dutch

(

(RD)

RD ADR), a major miner like

Rio Tinto

(

(RTP)

RTP ADR) or a steel maker like

British Steel

(

(BST) - Get Report

BST ADR) each could carve off assets that fit and sell the rest.

Indeed, the built-up legacy of a diversified company long known as the "Big Australian" may well prove an anachronism. In many of its commodity markets such as zinc, coal and silver, more focused companies exist -- many trading at lower multiples that Broken Hill's 17.8 and showing stronger growth than BHP's recent five-year rate of 8.7%, according to estimates provided by

IBES

.

"Fundamentally, these results don't really change anything," Matthews said. "The big question in the future is going to be what happens with commodity prices, and what happens with the new management."

Stewart Taggart is a financial and technology journalist based in Sydney.