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(generated from captions) and vision, we don't platforms, we elect philosophy

leaders. This whole notion of

and others saying I've been Julia Gillard and Anna Bligh

democratically elected. No,

they're put there by caucus room after election.

Let's get back to that I'm

hoping this week we see as Tony

Windsor keeps saying calm down.

I mean, I don't know where the

sense we've got to sort this

all out in three days has come

from, apart from particularly the News Limited papers. But I think it would be really good if

if we actually see some intelligent process happening

before our eyes. Where the

independents say, well, we do

like this, we don't like that,

we don't like this bit of the

Labor policy, we do like this

part of the Liberal policy and

it actually gets us back on to

policy as opposed to all positioning There was a huge

increase in the informal vote,

up to 14 ministers in one

Western Sydney seat. To the

extent that Mark

This Program is Captioned

Live. G'day there, welcome to

the program. The market is

having an ordinary August after

a jolly July, because second

thoughts are creeping in about

the strength of the global

recovery. Bond markets are

predicting recession, but

company profits look fine, some

fantastic category is BPH fantastic. One of those in the

Billiton, which is making a $1

billion a month profit from a

$1 billion a week in sales . It

is showing its faith in the

future by bidding $44 billion

cash for Potash Corporation

Canada. We will talk about that

and the global economy with BHP's finance chief Alex

Vanselow. As for the US

economy, the housing market

remains in intensive care, but

corporate balance sheets are in

recovery. We will talk to US

watcher Tom Murphy about that.

With the annual meeting season

almost upon us, we look at the

role of proxy advisory firm.

Are they keeping the bastards

honest or just being nuisances? This Program is Captioned


First, with the latest from

the markets and a busy

reporting season, over to Jayne

Edwards. The week ended on

Wall Street with some rarely

seen vigour in the share

market. As the indices each

adjourned by nearly 2% and the

Dow registered its biggest one

day rise in four weeks, giving

a strong lead for the local

mark tomorrow. Investors were

reassured by comments from fed

chief Ben Bernanke at a meeting

of central bank governors in

Wyoming that the Fed is ready

to use unconventional measures

to boost growth if the outlook

detier yots. There was growth

of 1.4% in the June quarter,

down from the 2.4% estimated

but not as bad as many analysts

expected, so it was interpreted

as good news. World markets

were shocked early in the week

by figures a showinging a

plunge in US housing sales and

a contraction in business sell,

leading to a sell-off in

shares. The UK was flat, Europe

dropped by 1%, Japan fell by

2%, amid continuing deflation,

and Australia gave away 1%.

With more, here's Tom

Elliott. It was a bad week

for shares on the Australian

share market. On the

international front, many

analysts are worried about the

prospect of a double dip

recession in the US. Locally,

we still have a hung parliament, this is

particularly problematic for

shares like Telstra, which

doesn't know if it will have to

compete with a $43 billion publicly funded national

broadband network, and of

course the big resources stocks

like BHP and Rio and Fortescue,

who don't know if they will pay

the special mineral resources

rent tax or no resources tax

whatsoever. We have the tail

end of the Australian results

season. Turning to BHP, the

biggest resource company, it

announced a record profit of

$14.4 billion, however CEO

Marius Kloppers was cause us

about the short-term out lock,

therefore the stock was weaker

over the week. Woolworths surprised with a good profit

report and a positive outlook

statement. The shares were up

and the shares of Wesfarmers

were down over the week.

Fairfax, probably the biggest

surprise of the week, a strong

performance for its shares,

after it surprised with its

profit and said things were

looking good for the year

ahead. There were some not so

good profit results, firstly

AGL, which tried to paper over

an average profit by saying the

cold winter in the southern

states will push up electricity

demand. Nice to see a big

company not blaming global

warming for a change. Fosters

took another big hit in the

wine division and their cash

cow beer division appears to be

losing market share even more.

Fosters shares were firm

because of the prospect of

takeover action from sab

Miller, Asahi or someone else,

depending on who you listen to.

Winner is prime infrastructure,

up 23%, after a takeover bid

from Canada's Brookfield

infrastructure partners. Loser

of the week as Ten Network

Holdings, down 14% after

unveiling plans to introduce a

third digital channel. Another

bleak week for the US economy,

with housing activity

continuing the downward spiral

and little evidence that any of the emergency policy settings

are working. For his take on

things, I spoke to Tom Murphy,

managing partner of family

office research apa close

wanter of the US investment

landscape. Do you think the

risks are growing of another

recession in the US? The most

compelling conclusion from the

data we are seeing is that the

US is going to have very

constrained growth for a number

of years, at least five on or

six years, because of the cost

of debt overhang. As the

interest cost constrains US

growth, we will periodically

have quarters when growth is

near zero or possibly negative.

It concerns me that the market

talks about a double dip and

uses terminology like that,

because that implies consecutive quarters of

negative growth. It is not my

view we will see that. I think

we will see slow growth, and

it's occasionally a negative

number, but the main point is

that the growth of the next few

years will probably be subtrend

by at least 1%, taking the

growth number to 2% or slightly

below, which is pretty

lacklustre growth and not

employment outlook in the enough to improvement the

states. It sounds like you

think the argument about a

double dip is beside the

point? I think it is. The

outcome, if it were to go on

for several years, could be in

some ways worse than a double

dip, because it will be hard

for investors to look forward

to a period of really good

growth in this kind of

environment. I think investors

that look to the emerging world

for their portfolio returns are

probably correct in making that

assumption. What did you learn

from this week's data in the

US? This week's data was

concentrated upon housing. We

had existing sales, then

housing starts. In Boeing

cases, US housing numbers gave

us a clear lesson. The number

of starts was the more

interesting of the two because

housing starts, which were

about a decade, were 1.4

million or 1.5 million a year,

are down to 400,000 or 500,000

a year, which is a number that

is so low, we have almost never

seen anything like this. It's

not a surprise, because the

housing prices in the US are

now at levels that are so far below replacement cost that

it's not a surprise people are

going towards existing housing

rather than new housing. The

trend will probably continue.

Long bond yields in the US are

at record lows, yet the share

market is holding up. Do you

think one of those two markets

is wrong? When we look at a

graph on stock earnings yields

compared to bond yields, we see

one of the two is quite wrong.

We could either get bond yields

rising and share prices rising

- in other words, a convergence

from both numbers, it's

possible - but we could also

see investors capitulate in the

sense that they give up on cash

deposits and move into shares

to get yield. Buying to get yield. Buying shares for

yield has never been the right

reason to buy shares, but there

are a number of Standard &

Poor's 500 companies in the

states, right across the

spectrum, whether it's 3M,

Dupont or Boeing, I could name

10 or 15 that have yields above

2 and in some cases above 3. If

you look at the two year bond

yield, which is not even 0.5%,

that tells us the cash rate

over the next two years will over the next two years wirage

average less than 2%. In other

words, there is no hope for

cashment management trust type

returns in the states over that

timeframe, meaning that a

retire ee in the US looking for

yield needs to go elsewhere.

You are describing a reason the

share market will rally, even

though growth in the US will be

immal for five or more years?

That will bring share market

support. What we look at the

graph of what happened in the

stockmarkets from 1933 to 1936

and onwards - an environment

not dissimilar to this one - we

saw stock prices fall a lot

further. But I don't believe in

this instance that will happen,

because earnings have been

strong and company balance

sheets in the US are becoming

stronger as cash builds up.

This could result in a buyback

pattern or it could result in

merger and acquisition

activity. The latter of those,

merger and acquisition

activity, is certainly what we

at Family Office research are

telling our clients is the

likely outcome. You are a bear

on the economy but a bull on

the stockmarket? Yes, slight

bull on the stockmarket. It

wouldn't surprise me if 12

months from now the Standard &

Poor's 500 is up from 1,200 or

12 50, because the earnings

outlook, which is not that bad

and the building cash planses,

which I mentioned. The wildcard

is the banks in the US, because

the banks have toxic assets and

they have homes which have been

foreclosed upon and are

building up on their balance

sheets, and the last wave of

the US housing downturn will

probably the liquidation of

those assets, thereby bringing

the last wave of the US

downturn in housing prices.

That's pretty much on the cards

for 2011. On that note,

thanks, Tom. Maybe it's the

spirit of the times. We have a

small band of independent MPs

wielding enormous power in

Canberra. With the AGM season

approaching, some big

remuneration packages to be

approved, corporate Australia

is no doubt sweating about the

growing influence of the very independent thinking proxy

advisory firm, with their

zealous approach to court

governance issues and armed

with votes of institutional investors have scored some

significant wins over the likes

of Telstra, Wesfarmers and Toll

Holdings. Neal Woolrich looks

at the growing power of proxy

advisory firm and why capital raisings and investment bank

fees are now in their sights.

For the past six years, Dean

Paatsch has been chipping away

at the walls of corporate

Australia as a director of the

proxy advisory firm ISS. These

days, he is about to build a

fence himself, as he takes a

career sabbatical. We don't

fire the bullets, we make them. fire the bullets, we make

I always think of us working

for financial intermediaries,

but on behalf of people who

entrust their savings to them.

His resignation coincides with

a period of relative calm

between company boards and

their some time nemesis, the proxy advisory firm, who

suggest to big investors how to

vote on matters like the

election of directors and

executive pay. The number of

instances that we see of egg

Rio de Janeiroous behaviour on

pay are few and far between,

they have certainly come down a

lot, after the demrofs. That

hasn't always been the case,

with proxy advisors often

getting a frosty reception a a

decade ago, when they attempted

to improve standards of

governance in corporate

Australia. It is the institutions typically that do the negotiations with the

company. We are not in there

saying, if you reduce this, we

will advise the other way.

Proxy advisory firm are like

the Australian Democrats, with

the same sort of mission, to

keep us bastards honest. I

think they have achieved that

mission pretty well over the

last few years, where they have

become consequential. There is

empirical evidence to

demonstrate that good

governance improves corporate

earnings and they have a role

to play in that regard. There

is a greater independence of audit committees, greater

attention to the formation and

the work of nominating committees, so that

committees, so that you get

good directors appointed and

good directors selected for the

future. Michael O'Sullivan has

feet in two camps as president

of the council of super investors, a proxy advisory

firm and as chairman of Care

Super. While he agrees progress

has been made on governance,

executive pay remains the key

issue. Some remuneration

policies are so complicated,

they take quite a loot of

unravelling, and you have to

make sure you understand them,

and we have had occasions where

chairman have come to meet with

us and admitted they couldn't

understand them eitherment

that's a very bad situation, to

be avoided and changed.

Brisconnections and UGL

chairman Trevor Rowe says proxy

advisory firm have definitely

played a positive role in the

corporate governance debate,

but but he worries about the

practice of criticising

directors when it is not clear

which individual is responsible for particular company

failings. I think that's a

very dangerous development, to

start forming opinions about

directors, based on past roles,

because there could well be

situations that are not evident

or not publicly available but

are not evident to the market

out there, so consequently

these judgments might well be

called into question. My own experience with proxy advisory

firm is that they do not have a

good understanding. Way

corporate boards work. Perhaps

none of our various

stakeholders really do

understand that. To offer an

opinion about the effectiveness of a particular director is a

bit of a reach. Proxy advisers

have also been criticised for

lacking expertise in certain

areas, like judging levels of

pay or fair value in a big

transaction. I think they do

have a role in identifying any

unusual aspects that may impact

value or impact on

shareholders' rights, not in

terms of forming views or

judgments relevant to the value

outcomes. We don't second

guess valuation issues lightly

at all. We have only

recommended against six

transactions on economic

grounds. It's really only where

the structure of those

transactions or the disclosure

or the valuation methodology s

are open to scrutiny. But

ACSI's Michael O'Sullivan says

criticism of proxy advisory

firm, can be misguided,

including a shoot the messenger

reaction at times. I recall that happening at Telstra, when

they got a 66% vote against

their CEO remuneration package,

they blamed Riskmetrics and

others for recommending against

the package. But within a year

they had reform the package.

The next big corporate

governance battle in Australia

could well be over the way

companies raise money using

share placements. Almost $100

billion was generated this way

during the demrofs gross, but

existing shareholders often saw

their ownership diluted, as

others were given preferential allocations at deeply

discounted prices. We believe

that, whilst placements were

absolutely required in some instances, there should be

fairness and openness, so

people's pre-emptive rights are

respected. Where anyone's

ownership interest increases as

a result of receiving a

placement, that should be

disclosed. They couldn't get

their money any other way, you

couldn't borery money, so you

had to raise he can equity and

raise it fast. A few of

raise it fast. A few of the old

niceties, I think, were pushed

aside. ISS has found that

investment banks in Australia

earned $2 billion in fees from

capital raised during the

financial crisis. A 2% levy at

very little risk. Dean Paatsch

says greater transparency is

needed to show who gets what

shares in a discounted placement. That will enable

investors going forward to

price in the risk of getting

ripped off, either by boards

who aren't very good on the

doing capital raisings or their

advisors, who may be reveal -

we don't know - as having a

systematic track record of

preferring their hedge fund

clients or their prop trading

desks, at the expense of, say,

Australian Super funds who have

been long, loyal shareholders.

But, as Dean Paatsch steps away

from the corporate governance

business, he warns that the

industry as a whole remains

understaffed and underfunded, with companies willing to spend

more on public relations to

spin their way out of trouble,

rather than fixing problems

before they cause major

damage. A $14 billion profit

was nice work for the world's

biggest miner BPH Billiton.

Even though it has made a

hostile $44 billion bid for

Potash Corporation and approved

a record $17 billion spend on

new projects this year, the

official line at the annual results briefing was that BHP

is cautious about the future.

How cautious is spending $60

billion? I spoke to BHP's money

man CFO Alex Vanselow. When

the bid for Rio Tinto was

withdrawn, BHP started saying

it would build rather than buy,

it was all about the

development projects, all the

presentations showed the

pipeline of development

projects. Is the bid for Potash

Corporation of Canada a bit of

a backflip from that attitude?

It seems that way? No, it is

actually not. We are very well

endowed in resources, we can

follow the build process for a

long term. Buying is

opportunistic. When the valuations match, when the tire

1 assets, the assets that are

long life, expendable, fit with

our portfolio, present themselves as an opportunity to

buy, we need to act on that.

What is the opportunity that

arose in Potash Corporation,

its price came down? The opportunity with Potash

Corporation is that we are in a

situation where our balance

sheet allows us to raise the

credit necessary to buy the

viewses match, and basically if

you look at the landscape of

competitors, they are not in

the same position as we are.

Taking all this into

consideration, you see this is

an opportune time. The

opportunity to some extent

arises from BHP's financial

strength, the cash that you

have? The 'Financial Times' lek

columnist calls it flashing

your black Amex card. I don't

know if it's a black Amex card,

but the disciplines of the past

have led to the position we are

in at present and it is unique

in our peer group. The other

disconnect is that in

presentations in week and in

the past the company talked

cautiously about the future,

listing the things that would

cause you not to make big

takeover offers, the problems

in the manufacturing industry

around the world, the high

sovereign debt levels, and

China is slowing as well. Does

the fact that you are now

bidding $44 billion for Potash Corporation mean that you are

not that cautious, you are

optimistic as a company? We

have been optimistic in the

long-term from the beginning

but cautious in the short term.

We are saying in the short term

we will see more volatility,

but the bidding blocks for the

long term are still the same.

When we look at an acquisition like Potash Corporation, we

look at the long term many we

are able to deal with the short

term volatility because of the

diversification in our portfolio and the strength of

our cash flows, but in the long

term we are very positive about where the world economy is going. Potash Corporation's

share price is well above your

bid, I think it is 30 or 40%

above. Can you pay more? There

is only one offer on the table,

so why would we compete against

ourselves? The issue is that

the offer is

the offer is for $130, Potash

Corporation on 22 June, came to

the market, presented their

growth profile, presented their

prospectus for commodities in

the company, it was all priced

in that their shares and we approached them after that. We believe it's a fair believe it' it's

believe it's a fair offer, it's

the only offer, and that's

where we are today . You went

hostile very quickly. It took

months to go hostile with Rio

Tinto, this time it took three days. They took the proposal

public and we had to respond

with an offer. Is it fair to

say that you really need to win

this, having lost out on Rio

Tinto, and there is a sense

that Marius Kloppers, the CEO,

his job is on the line with

Potash Corporation, not about

winning it but about making it

work? We don't see that. We

see if there's value for the

shareholders we will pursue it.

If the value is not there, like

it wasn't at one stage with the

Rio Tinto bid, we have no

trouble walking away from it.

We will be in the potash business, with or without

Potash Corporation. A couple

of traders with Santander Bank

in Spain have been charged with

insider trading. How do you

guys feel about that? Santander

Bank is advising you, so what

do you think happened, some

Chinese walls broke down? Santander Bank is in the

facility as one of the

underwriters of the credit facility. It is disappointing

that that happened, but it is

an issue for Santander Bank to

deal with. Does it mean you

are less likely to use

Santander Bank in future? I

think we will investigate what

happened, we will get the

feedback from Santander Bank

and then decide on that. The

facility you talk about is six

banks, $45 billion, is that correct? That's about right, yes. Are you confident you

will be able to keep your

credit rating? You have said credit rati your credit rating? You

you want to maintain a mid

level A credit rating. What

does that mean? Is that

conditional on that sort of

debt level? That's part of the

strategy, the solid A credit

rating, which means we are not

foreseen to go below investment

grade, and that's a commitment

we have made on our strategy.

If you look at what the rating

agencies have come out with,

you see that we are in that

level. The results this week,

a big increase, big many prompt

on last year. How much of the

improvement is due to volume

increases and how much to

price? I think price played a

role in some of the LME

commodities, and they had a bit

of outperformance on that in

terms of EBIT from the previous

year. In some of the bulks,

price came down, which made an

impact as well. Volume was the

key differential. She had new

production coming online on

petroleum and a significant

recovery in production of

metallurgical coal and

manganese, so the impact of the

volume was significant, close

to $2 billion of new volume.

That means about $1 billion is

due to price? Price actually

was net of foreign exchange,

which has some correlations,

the Australian dollar, the

Chilean peso, against price,

what was a net decrane of $1.1

billion. What does it tell you

in terms of what happened last

year and looking at the economy

now, what does it tell you

about your cash flow and profit

outlook? The cash flow for the

short term is, as Marius said

last night, quite predictable,

not just the demand side that

plays a role. One of the events

that was triggered by the

global financial crisis is a

lot of our peer competitors did

not invest for the last 12 or

18 months, so what you have

seen is an inability of supply

to react, even to a lower level

of demand. That's keeping

prices at the levels they are

now. So you are looking at

demand and you see some

debillity on the economic side,

China has slowed down, Europe

is looking shaky, but the

supply side is unable to

respond as well. We on a volume

bases are producing and selling

more today than we were before the global financial crisis.

What is going on with that?

Usually when there is a boom

and prices go up, everyone

invests in more supply, that

drives the prices down again.

Why didn't that happen this

time? Because a lot of the

peers overcommitted their

balance sheet and they had to take severe

take severe measures to save

cash. One measure was to stop dividends, which most of them

did, and the other measure was

to stop capital deployment,

which most of them did. Was that connected to the global

financial crisis? It was much

Did they overcommit their

balance sheets apart from

that? The overcommitment came

prior to the demrofs demrofs so

the impact was fully felt

during the demrofs demrofs. On

the other hand, we invested

close to $10.7 billion during

the last 12 months and

increased our dividends, so a

very significant contrast to

the peer group. How long do

you think the situation will

last where your competitors and

supply generally is supply generally is short? The

gap is permanent. What you have

now is catch-up time. All the

peers are now starting to

reinvest in their businesses,

but in our business it takes

two or three years to generate

new capacity. The one year gap

is permanent, but in two or

three years time it will be

normalised. The Australian

political situation is fluid at

the moment, the big issues is the mineral resources rent tax.

The Greens and independents are

saying that the mining industry

is in principle in favour of a

resources rent tax, this just

didn't like the one that was

announced; is that correct? We

are the largest single taxpayer

in Australia, we paid $5.5

billion in tax, which gives an

effective tax rate of 46%. That

is quite a significant tax

burden. We are not against tax.

We want to make sure that

whatever tax is applied in

Australia, is not retro active

and is globally competitive. As

long as it is prospective and

globally competitive, we are

ready to accept that. Are you

in favour of switching from

volume based add Val or yem

royalties to a profits based

resources tax? Again, as long

as it's competitive. You don't care? As long as it's

competitive. What level is

competitive? You signed off on

the MRRT that was finally

announced. Which is

competitive. You are okay with

that? We are okay with that.

We signed off and we would

honour it. The smaller mining

companies, led by Andrew

Forrest of Fortescue, are not

okay with it a at all Then

you have to discuss with

Fortescue. Thanks for joining

us, Alex Vanselow. You are very

welcome. Another good result this week was

Woolworths, $2 billion profit

and a $700 million share

buyback, which put a dollar at

share price and a smile on

shareholder's' faces, all

retailers have had a fine

couple of months, as buoyant

consumer confidence has boosted

retail sales. I wonder how

long the good times will last. The light at the end of the tunnel might be a train after

all. One of the hottest iPhone

apps in the US is called Red

Laser. When you are in a shop,

you can use the camera in the

phone to scan the bar code,

point it at it, and it will

tell you where there is a

cheaper version of the same

product and give you to map to

get there, or take you to the

online retailer's website, to

buy it on the spot. It doesn't

work in Australia because the

retailers haven't put their

prices on it. In the US, most

of the big retailers are with

the program, especially the the prog cheap

cheap ones. It's the ultimate

tool for xrarn shops and is

driving down retail margins, as

value of retail properties. well as store rents and the

This is the part of the online

revolution that is barrelling

around the bend towards

around t I traditional

traditional retailers. I heard

the new chief of the Australia

Post Ahmed Fahour giving a

speech. Letter volumes are

declining, but he made a

convincing case that Australia

Post's future is all about

delivering parcels to online

shoppers. All that tells me

that just as media companies

are in the grip of a value

destructive revolution, retailers are about to get

theirs. That's it for the

program. Transcripts and video

and a vodcast of today's stories and interviews will

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