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Here’s why BHP Billiton Limited needs to announce a buyback

Shareholders have had to remain patient with BHP Billiton Limited (ASX: BHP) (and the mining sector in general) in recent years, as they have watched their shares plunge in value while the broader S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has scaled new highs. As such, they have demanded improved returns and BHP promised to deliver once its debt fell below US$25 billion.

With the miner’s net debt level fast approaching that much publicised target however, we are still left wondering which way the miner will go with its capital management. It seems that if its goal really is to appease its shareholders, it really only has one option.

Evy Hambro, who is fund manager of BlackRock and the largest shareholder of BHP, has stated that a share buyback would be a much better alternative than a special once-off dividend payment. Speaking to The Australian Financial Review, he said: “Buybacks reward the investors and shareholders who stay on the register for the long term… Special dividends don’t really result in anything long term.” Theoretically, a buyback would push the price of the shares up gradually by reducing the number of shares available for purchase on the open market.

If BHP really wants to reward its shareholders, it will surely have to consider its largest shareholders’ views. It is estimated that, excluding any proceeds that may be recognised from the sale of non-core assets from this point on, BHP could afford to return roughly US$10 billion to shareholders over the course of two years. Rio Tinto Limited (ASX: RIO) is also considering its capital management options to reward shareholders, although BHP will be the first to announce its to the market.

Foolish takeaway

BHP Billiton is by far the safest bet from the mining sector given its size, lower cost base and higher level of diversification. However, considering the strong headwinds still facing the sector, you might be better off remaining on the sidelines for now and instead consider some of the more incredible opportunities on offer.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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