BHP tables US$6.4B loss in worst-ever year

VANCOUVER — BHP Billiton (NYSE: BHP) has posted the worst annual financial results since its inception in 2001, but CEO Andrew Mackenzie now says the “free fall” has likely passed for natural resource markets.

The world’s largest mining company saw its annual revenue fall over 30% to US$31 billion, which led to a US$6.4-billion net loss for the fiscal year ended June 30. The result included net impairments of US$7.7 billion, which were largely attributed to US$4.9 billion on U.S. energy assets and US$2.2 billion related to the deadly tailings spill at the Samarco joint venture in Brazil.

BHP’s performance did show recent operational improvements driven by its focus on “core, low-cost” assets, with its underlying profit totalling US$1.2 billion, or US23¢ per share.

A tailing dam failure at BHP Billiton and Vale’s Samarco operation flooded regions homes in Bento Rodrigues district of Mariana, in the Central Region of Minas Gerais. Credit: Rogério Alves/TV Senado.

The company’s flagship iron ore division accounted for earnings of US$5.6 billion, while its petroleum and copper units generated US$3.7 billion and US$2.6 billion.

“This past year was difficult for the resource industry,” Mackenzie said during a video conference. “Notwithstanding that fact, we’ve achieved solid results. And we’ve done it focusing on the things that really matter in terms of cost control and lower corporate overhead. That has put us in a good position, with a strong and disciplined approach to capital management. We’ve increased productivity at many of our operations, but obviously that achievement was offset by falling commodity prices.”

BHP is a bellwether for the base metal and oil sectors, which have not rebounded in 2016 alongside the precious metals sector due to weak global economic growth and widespread oversupply.

Shenzi petroleum development in the deepwater Gulf of Mexico. Credit: BHP Billiton.

Mackenzie conceded the near-term outlook for industrial metals and energy is bleak.

BHP also signalled it is not poised to enter the mergers and acquisitions market due to its fiscal year-end net debt of US$26 billion.

“Our vision for long-term growth focuses on existing assets that sit within the portfolio. These don’t require a significant increase in commodity prices, but when you pool them all you see a significant increase in the value of our company,” Mackenzie said.

“Despite lower-than-expected growth in the developed world, we are confident that the demand in these commodities will increase. We’re especially focused on oil and copper because declining grades and base supply tend to pull markets back into balance,” he added.

Material at BHP Billiton’s Port Hedland iron ore port facility in Australia. Credit: BHP Billiton.

The company also noted a recent rise in metallurgical coal prices underpinned by seasonal demand, China’s domestic capacity controls and temporary supply disruptions in Queensland, Australia. BHP’s longer-term met coal outlook remains “robust” due to a projected scarcity of premium product and demand growth driven by steel production in India.

Regarding BHP’s large-scale Jansen potash asset in Saskatchewan. The company recently cut US$130 million from its project budget, as fertilizer markets have remained depressed. Jansen’s total capital expenses are estimated at US$14 billion, and BHP is sinking nearly US$4 billion into preproduction activities at the site. The major infrastructure work involves developing twin shafts, which are expected by early 2019.

“We’re making progress on the project after a challenging start,” Mackenzie said. “The shafts are well underway, and we’re doing it under a lower budget. When we finish that work we’ll face the decision on whether to build an operation. It’s perfectly possible we could mothball the shafts once they are completed if market conditions have not improved, and we continue to talk to partners about a potential stake.”

Jansen potash mine shaft development 140 km east of Saskatoon, Saskatchewan. Credit: BHP Billiton.

BHP is striving to cut costs, and has saved US$437 million this year. The company is targeting another US$2.2 billion in savings by the end of fiscal 2017. Capital investment at Jansen alone has totalled US$2.6 billion to date.

BMO Capital Markets analysts David Gagliano and Edward Sterck note that BHP’s underlying annual results are “better than expected,” though the failure to reduce net debt “may be seen as a slight negative, where peers have managed to improve their balance sheet positions.”

Shares of BHP have traded in a 52-week range of US$18.46 to US$38.10, and closed at US$31.50 at press time. The company has 3.2 billion shares outstanding for a US$79-billion market capitalization.

“Our position gives us many options to increase production volumes as prices recover. We’ve unwound a decade of cost inflation, and we’re going to deliver further declines in unit costs this year,” Mackenzie said.

BHP expects another US$1.8 billion in “productivity gains” next year, which it says could deliver more than US$7 billion in free cash flow based on current commodity pricing and forecast debt reductions.

Samarco Photo Credit:
Bento Rodrigues, Mariana, Minas Gerais by Rogério Alves/TV Senado (flikr.com)
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