The Big Australian BHP-Billiton (BHP) announced their interim or half year results to the market this morning. Given that the top four miners and top four banks, by their dominance and size in the index (and unfortunately, the economy), these result have higher than normal importance.
You may have heard about it, since it was plastered across the mainstream media press today:
Bloomberg
BHP Billiton Ltd., the world’s biggest mining company, reported a 5.5 percent drop in first- half profit, the first decline since 2009, driven by a slide in base metals earnings.
Dad’s Army At face value BHP Billiton’s first-half result might appear a little disappointing. In the resources boom era, the market has become accustomed to ever-soaring profits and dividends and regular capital management initiatives from the industry heavyweight – not profit declines, steady dividends and no buybacks.
Fairfax
Since Paul Anderson rescued BHP from a series of acquisition and project development disasters in the late 1990s successive generations of leadership have rolled out the strategy he created.
Essentially it sees BHP focusing exclusively on low cost, long-life top quality projects, and for the group to hedge the risk posed by market moves in any one commodity by maintaining a suite of mining and oil and gas assets.
The Cupboard BHP Billiton’s first-half net profit has fallen 6 per cent to $US9.94 billion, largely in line with expectations, as royalty and tax increases wiped out growth in profit before tax.
The headline numbers are impressive in size yet disappointing at first glance: underlying earnings (before interest and tax payable) of $US15.7 billion, up 6% on the corresponding period, equating to a profit of $US9.9 billion, down 7%. This missed consensus expectations, which have been steadily downgraded over the last 3 months, as commodity prices fell.
The major drag on the result was reduced base metals, petroleum and metallurgical coal volumes and prices. Thankfully iron ore shipments provided the bulk (sic) of underlying earnings, and at a whopping margin:
And this trend seems set to continue, with huge growth in Western Australian Iron Ore (WAIO) production predicted:
BHP is a very high capital expenditure business, and about the only commodity based business that is able to turn this inherent disadvantage (in addition to being beholden to volatile commodity prices) to a competitive advantage, as it has a hugely diversified mix of mining projects.
Therein lies the risks, as the Big Australian has decided that it intends to spend more than its operating cashflow by reversing its previous gearing level to 25%, to cover the nearly $30 billion in capex. This is not very high and indeed below its average level pre-2008, but signals a slightly higher risk for the company.
This strategy relies upon the inherent belief that commodity prices will remain high, mainly due to the Chinese boom, and capital/debt raisings can continue to be made at low cost.
The CEO Marius Kloppers today stated that:
…we expect underlying demand growth rates to remain robust, so long as the macro-economic policy setting of the developing world retains a growth bias.
In other words, stimulus-based GDP growth must be continued. Not sure how this fits into the European austerity measures that are forthcoming, given that is China’s No.1 export destination.
Analysts and brokers remain convinced that BHP is a great buy, with no sell ratings (mainly strong buys) with valuations for the Big Australian in the $52 to $63 range, strongly above the closing price today at $37.75 per share.
