THE MINING CRUNCH: What to watch for in BHP Billiton's results this week

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BHP releases its half year results tomorrow with a huge fall in earnings expected as the big miner deals with a low commodity price world created by slowing economic growth in China, an oversupply of metals, and a glut in oil.

Profits are expected to be overshadowed by writedowns, including $US7.2 billion on the oil shale assets in the US and a possible provision for the fatal mine disaster in Brazil.

And profits are expected to drop about 90% from last year’s first half result of $US4.265 billion. Also missing from this year’s numbers is earnings from the businesses packaged into South32, the BHP spinoff.

Here are the key numbers the market will be looking for, via Chris Weston at IG Markets:

  • Revenue – $15.94 billion (-46% YoY)
  • EBITDA – $6.14 billion (-57%)
  • Underlying NPAT – $750.6 (-84%)
  • Net operating cash flow – No consensus on this metric, but the figure is likely to be less than $5 billion ($10.324 billion pcp)
  • Net debt – $26.47 billion

But the big question is whether BHP will cut its dividend and change the way it calculates payouts in the future, as rival Rio Tinto has already announced.

Some analysts expect BHP to reduce the interim dividend to 31 US cents from last year’s fully franked 62 US cents, cutting the total payout in half to $US1.6 billion.

BHP’s shares are trading on the ASX today at $17.12, but have recently been as low as $14.06, from a high of $31 over the last year.

Citi recently upgraded BHP to a “buy” with a price target of $18.

The share price fell hard after the fatal mine disaster in Brazil in early November.

The disaster will have long term impact on BHP’s finances. The Brazilian government and other authorities intend legal proceedings against the iron ore miner Samarco and its parent companies, 50/50 joint venture partners BHP and Vale, for damages of about $5.2 billion.

BHP’s bill could run to between $US2.5 billion and $US3.5 billion.

Earlier this month Rio Tinto’s announced that its full-year underlying earnings had been cut almost in half to $US4.54 billion. Rio maintained its dividend, at 215 US cents steady on last year, but the company decided to abandon its progressive dividend policy, meaning it is unlikely to keep payouts at that level.

BHP’s credit rating has been cut to A from A+ and the company placed on credit watch with negative implications.

Standard & Poor’s this month forecast BHP’s ratio of funds from operations to debt fall to 30% to 40% over this year and next, well below the rating agency’s threshold for an A+ rating.

And the ratings agency has cut its outlook for commodities.

“Metal prices have come under pressure because of fears of lower demand from China, and excess supply remains an issue,” Standard & Poor’s says.

“Moreover, particularly relevant for BHP Billiton, the oversupply of crude oil in the market results in very weak oil and Henry Hub gas prices, which we now believe will last over the foreseeable future, putting further pressure on its balance sheet.”

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