BHP's half-yearly profit just beat expectations

(Photo by Paula Bronstein/Getty Images)

BHP Billiton’s half yearly results announced on Tuesday underscored the boom and bust cycle of mining profits and commodity prices.

The world’s largest miner reported a seven-fold surge in profits, boosted dividends and slashed debt. It posted a $US3.24 billion ($4.2 billion) underlying profit for the six months to December 31 compared with $US412 million a year earlier, when it booked a huge loss on write-downs on its US oil assets and the Samarco mine disaster.

Today’s result beat expectations for a $US3.1 billion profit. BHP announced a dividend of 40 US cents, compared with 16 US cents a year earlier.

BHP’s profit surge mirrors rival Rio Tinto, which posted its first profit increase since 2013 and bestowed investors with a share buyback and bigger dividends.

Miners are rebounding from a commodities downturn that forced asset sales, cost curbs and a cut in investment to check supply amid a glut. Iron ore surged more than 80% last year thanks to Chinese stimulus that boosted steel output, leading to better demand. While the price of the metal has now surged to its highest level since August 2014, there are concerns over whether the price gains will be sustainable amid increasing supply and potential for a slowdown in Chinese demand.

This table from BHP summarizes the earnings statement

“This is a strong result that follows several years of a considered and deliberate approach to improve productivity and redesign our portfolio and operating model,” Chief Executive Officer, Andrew Mackenzie said in an accompanying media statement. “We are confident in the long-term outlook for our commodities, particularly oil, with markets expected to rebalance in
the near-term, and copper where we expect a deficit to emerge in the early 2020s.”

It said total copper production guidance for the 2017 is under review as a result of ongoing workers strike at its Escondida mine in Chile. BHP in January forecast total full-year copper output of 1.62 million tons, including about 1.07 million tons from Escondida.

BHP warned that iron price would come under pressure in the short term from moderating Chinese steel demand growth, high port inventories and rising low cost supply. It expected coal prices to ease once Chinese supply constraints were eased and oil to remain supported as investor levels reduce.

The miner cut debt to $US20.1 billion from $US26.1 billion, a year earlier. Capital and exploration expenditure decreased by 38% to $US2.7 billion, it said. Howevere it forecast increase in the current year and next as it ploughs almost $US2 billion more into exploration following the successful bid for Trion asset in Mexico and positive drilling results at LeClerc and Caicos, it said.

This table shows the increase in capital and exploration expenditure

The company achieved $US1.2 billion in savings in the first half and said it remains on track to boost annual cost cuts to $US1.8 billion, excluding any impact of the workers strike at Escondida.

Total revenue surged 20% to $US18.8 billion and net profit soared 157% to $US3.2 billio, it said. The first half results had $US155 million charge towards the Samarco dam failure. BHP and Vale, the other shareholder in Samrarco intend to open the mine subject to separate negotiations with relevant parties, it said. The mine will open only if it is safe, economically viable and has the support of the community.

BHP’s earnings compares with a net loss of $US6.4 billion in year ended June 2016, its first annual loss since it was formed in the 2001 merger of BHP and Billiton. Underlying annual profit at $US1.2 billion was the lowest since fiscal 2001.

Analysts from National Australia Bank to HSBC are calling for a drop in iron ore prices, BHP’s top earner, and hold a similar view on Chinese demand as BHP. David Pleming, head of Europe, the Middle East and Africa metals and mining at HSBC, says that after some seasonal strength in the first quarter of this year, the iron ore rally “will give up its gains as we progress through the year”. Beyond the current quarter, Pleming says the bank’s long term price forecast is for spot prices to decline to $US52 a tonne. That is a big decline from the more than $90 per tonne current level.

Part of the reason behind the call is an expected ramping up of supply from seaborne markets. Significant iron ore supply growth is expected to come on stream over the next two years, driven primarily by the majors: Vale’s, Hancock’s Roy Hill Rio Tinto’s Pilbara, BHP Billiton’s expansion.

“China’s economic growth is expected to moderate in the coming year,” BHP said. “We anticipate a cooling of growth rates in the housing and automobile markets in combination with a continuation of strength in infrastructure. Manufacturing investment should stabilise, however exports may be challenged by the rising threat of protectionism.”

BHP’s Mackenzie said the miners move to sell assets and cut cost have paid off and allowed the firm to make the most of higher commodity prices.

“Our assets are large, long-life and low-cost and provide exposure to a diverse mix of commodities with an attractive outlook,” he said. “Our new operating model has sharpened the focus of our operations on the things that matter most: safety, volume and cost.”

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