Elliott, which holds 4.1% of BHP’s London shares, sent the company a letter yesterday outlining a plan to unlock value and improve capital returns by around 50%.

Step one under the Elliott plan would be to unify BHP’s dual-listed company structure into a single Australian-based and Australian tax resident listed company.

Step two would be to demerge the US petroleum business and list it in New York, while the third is to adopt a consistent and value-optimised capital return policy to monetise the substantial franking credit balance through discounted buy-backs.

BHP confirmed it had been in discussions with Elliott for “many” months and that it regularly reviewed opportunities to create value.

“After reviewing the elements of Elliott’s proposal, we have concluded that the costs and associated risks of Elliott’s proposal would significantly outweigh any potential benefits,” BHP said.

BHP said it kept the dual-listed structure under review, but could not identify benefits to outweigh the significant costs of unifying the company.

As for the New York listing of the US petroleum assets, BHP said there was no obvious discount in its trading multiples relative to the weighted average of relevant mining and oil and gas peers.

“BHP Billiton has disclosed the information the market needs to fully value the petroleum business,” it said.

“BHP Billiton’s approach is to optimise the long term value of the petroleum business through operating excellence.”

The company said it continued to assess the value buy-backs could create compared to competing objectives of strengthening the balance sheet, investing in growth or upping dividends.

BHP said it had returned around US$23 billion to shareholders in buy-backs since 2001, and paid around $56 billion in dividends.

“Since 2013, BHP Billiton has reduced the number of assets in the portfolio by more than one third, through the demerger of South32 and the sale of over $7 billion of assets,” it said.

“We have reduced unit costs by more than 40%. Under BHP Billiton’s updated dividend policy, shareholders now receive a minimum 50% of underlying earnings as a dividend each period.

“We have introduced a rigorous capital allocation framework, which balances value creation, cash returns to shareholders and through the cycle balance sheet strength in a transparent and consistent manner.

“In doing so, we have laid the foundations for the group to substantially grow the base value of its operations. Elliott’s proposal would put this at risk.”

BHP said it would provide a more formal response in due course.

Investec analysts described Elliott’s suggestions as “sensible”, while RBC Capital Markets analyst Paul Hissey said the ideas were nothing new.

“We believe global mining companies should be questioning the conventional diversified model in a new low debt, shareholder returns focused world,” he said.

“We would argue that the onshore business isn't the most compelling factor of BHP's investment case, given is capital intensity and lack of free cashflow generation (so far).

“We await BHP's formal response to the letter but expect the company to resist given its favourable view of the petroleum market, having recently set out petroleum as their top pick in terms of supply opportunity and time until market rebalance.”

BHP shares rose by 3.5% in New York overnight and by 2.2% in London, after gaining 4.6% to A$25.73 in Australia yesterday.