BHP returns to profit but misses forecasts

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BHP is back in the black, buoyed by higher commodity prices, with a full year profit of $US5.9 billion.

But the result was below expectations. Underlying profit was $US6.73 billion and analysts had been forecasting around $US7 billion.

Revenue was up 24% to $US38.28 billion, much of it from iron ore earnings as prices surged due to higher iron production in China.

BHP, on average, lifted the price it got for iron ore by 32% over the year. Revenue for iron ore was $US14.62 billion compared to $US10.54 the year before.

The result was a contrast to 2016 when BHP posted a loss of $US6.23 billion.

And today BHP announced a bigger than expected dividend. The dividend policy is a minimum 50% payout of underlying profit, bringing the second half payout to 33 US cents. However, the board has declared an additional 10 US cents, taking the final payout to 43 US cents.

Overall in 2017, dividends of $US4.4 billion, or 83 US cents per share, are being paid.

The 2017 numbers in brief:

Source: BHP

CEO Andrew Mackenzie says BHP had a very strong financial year with free cash flow at $US12.6 billion, the second highest on record.

BHP used this cash to reduce net debt by nearly $US10 billion to $US16.3 billion and return $US4.4 billion to shareholders.

Productivity gains increased return on capital to 10%.

“This strong momentum will be carried into the 2018 financial year, with volume growth of seven per cent and further productivity gains expected,” says Mackenzie.

“Our relentless focus on cash flow, capital discipline and value creation should allow us to significantly increase our return on capital by the 2022 financial year.”

BHP’s war on costs continued. The company reported productivity gains of $US1.3 billion over the year, with more than $US12 billion accumulated over the last five years. Another $US2 billion is forecasts by the end of the 2019 financial year.

BHP’s 2017 performance by segment:

BHP also decided that its onshore US assets are non-core and will look at selling them off.

“We are actively pursuing options to exit these assets for value,” the company says. “In the meantime, we will complete well trials, acreage swaps and assess midstream solutions to increase the value, profitability and marketability of our acreage.”

In Brazil, the company continues to work on social and environmental remediation programs following the Samarco fatal dam failure in 2015 which left 17 people dead.

In the 2017 financial year, BHP reported an exceptional loss of $US381 million after tax in relation to the Samarco dam failure.

“Restart of Samarco’s operations remains a focus but is subject to separate negotiations with relevant parties and will occur only if it is safe, economically viable and has the support of the community,” BHP says.

Mackenzie says world economic growth is likely to be close to the top of the anticipated range of 3% to 3.5% in the 2017 calendar year.

China’s economic growth is expected to slow modestly in the 2018 financial year, while remaining within the official GDP target range of between 6.5% and 7%.

However, BHP expects to see a cooling of growth rates in China’s housing and automobile markets in combination with a continuation of strength in infrastructure.

“Our views on long run Chinese steel use are unchanged, with a growth rate of approximately 1% per annum building towards a peak in the mid-2020s,” BHP says.

“The recovery in the rest of the world is likely to continue after a multi-year stagnation. In the long term, the global steel market will grow modestly, supported mainly by incremental demand from India and other populous emerging markets.”

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