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BHP Billiton witnesses massive turnaround

Anthony Fensom  |  22 Feb 2017Text size  Decrease  Increase  |  

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Mining giant BHP Billiton (ASX: BHP) turned around its fortunes in the half year to 31 December, delivering profits and dividends on the back of productivity improvements and higher commodity prices.

The world's biggest mining company reported a net profit of US$3.2 billion (A$4.2 billion), in stark contrast to its US$5.7 billion loss in the previous corresponding half.

Underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) rose by 65 per cent to US$9.9 billion, with an underlying EBITDA margin of 54 per cent for the December half.

The "Big Australian" said it achieved US$1.2 billion in productivity gains during the period and remained on track for US$1.8 billion of gains for fiscal 2017, depending on any industrial action at its Escondida copper mine in Chile, which could affect its copper output.

Revenue rose by 20 per cent to US$18.8 billion, with BHP benefitting from higher prices for coal, iron ore and gas. Compared to the previous half year, prices for hard coking coal surged by 118 per cent and weak coking coal by 82 per cent, while iron ore prices increased by 28 per cent.

The company said it cut capital and exploration expenditure by 38 per cent to US$2.7 billion, but planned to invest US$5.6 billion in fiscal 2017 and US$6.3 billion in the following year, reflecting increased exploration spending at its Trion oil field in Mexico and positive drilling results at its LeClerc and Caicos oil and gas projects.

BHP said it strengthened its balance sheet, cutting net debt by US$6 billion since June 2016 to US$20.1 billion on the back of its stronger cash flow and favourable interest and exchange rate movements. This reduced its gearing ratio to 24 per cent, compared to over 30 per cent at June 2016.

Shareholders will also benefit from the improved performance, with BHP declaring an interim dividend of 40 US cents a share, comprising a minimum payout of 30 cents in accordance with its 50 per cent payout policy and an additional payment of 10 cents.

BHP said substantial progress on social and environmental remediation programs had been achieved following the Samarco disaster in Brazil, with a preliminary agreement made with the Brazilian Federal Prosecutors' Office.

"Restart of operations remains a focus but will only occur if it is safe, economically viable and has community support," it said.

Morningstar senior equities analyst Mathew Hodge said BHP's net profit was slightly softer than he had forecast, due to a slower decline in iron ore costs, lower realised prices for copper and coking coal, and a higher tax rate of 35 per cent.

BHP's chief executive officer, Andrew Mackenzie, described the improved earnings as "a strong result" that followed several years of a considered and deliberate approach to improving productivity and redesigning the miner's portfolio and operating model, which allowed it to take advantage of stronger prices.

"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. We have the right settings in place to substantially grow shareholder value," he added.

BHP said world economic growth would likely remain within a range of 3 to 3.5 per cent in calendar 2017, although it could be impacted by rising political uncertainty, while China's economic growth could moderate in the year ahead.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

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