UPDATE: As profits pinched BHP sees opportunities

Vancouver – Despite a mixed bag of financial results in its half-year ending Dec. 31., BHP Billiton’s (BHP-N, BLT-L, BHP-A) CEO Marius Kloppers said in a conference call with investors and analysts that BHP’s performance over the reported six months was strong, especially when compared to others in its “peer group”.

 

“To emphasize up front, we are extremely well positioned at this point in the cycle, well differentiated from others in our sector,” Kloppers said at the outset of the call. While BHP saw earnings before interest and tax (EBIT) increase by about 24% to US$11.9 billion, its profits from operations slumped by about the same amount to US$7.2 billion.

 

Throughout the call Kloppers struck an optimistic tone arguing that although the outlook on commodities was worse than it had been in a long time it was in fact presenting opportunities to BHP.

Reflecting on events since BHP’s previous and considerably more optimistic half-year update Kloppers said, “Like most observers…we did not foresee the speed of deterioration that we have now witnessed. It is unlike anything I have seen before, and it’s unlike, I think, what most people have seen.”

 

He noted commodity prices of BHP’s products had fallen 50-60% during the six-month period and that there was no recovery in sight. “Growth forecasts continue to be revised downwards”, he said, arguing that most observers had been too optimistic about when the tides of global economic fortunes will turn.

 

Yet in face of cool economic climes he showed optimism for continued growth from developing countries. In BHP’s half-year report the company writes, “Whilst the global economy faces significant challenges, our long term outlook remains unchanged. We expect emerging economies’  long term growth to be robust as they continue on the path to urbanization and industrialization.”

 

While he agreed China’s economy was slowing, he nonetheless said, “our story for China is unchanged…it is at a relatively early stage of development.” And he argued that China was not the be-all and end-all for BHP. He noted that 65-70% of BHP’s sales were outside China.

 

He also described how he believed the current global recession and its effects on commodity markets could benefit BHP. “In this market there will be numerous opportunities to purchase assets more cheaply than in the past,” he said, without discussing specific targets.

 

Others in the sector, he said, were having to switch from a focus on long-term growth to one of short-term survival. He noted the huge production cuts and deferrals of capital expenditures recently announced by some mining companies.

 

He ended the call boasting that BHP would maintain its 4¢-per-share payout while some other companies were cancelling theirs. Kloppers said “that, in itself, shows a great differentiation between us and the peer group.”

 

Summary of half-year results

  

Impairment charges pushed BHP’s attributable profits down quite a bit further than operational profits. Attributable profits were US$2.6 billion or 56.5% less than they were during the half-year ending Dec. 31, 2007.

 

A large chunk of that impairment charge, US$3.4 billion, stemmed from BHP’s recent closure of its Ravensthorpe nickel mine in Australia and concomitant cessation of nickel cobalt hydroxide production at its Yabulu facility.

 

BHP also reported costs for the six months ending Dec. 31 were up US$1.8 billion. Much of that, US$592 million, came from higher prices of fuel, energy, coke, sulphuric acid, pitch and explosives, BHP says.

 

Lower copper output at its Escondida mine in Chile, due to unplanned interruptions and falling copper prices, contributed to a US$333 million reduction in BHP’s EBIT.

 

Its petroleum division added US$2.7 billion to EBIT, up 36%, while the contribution of aluminium, base metals and stainless steel to EBIT decreased by US$4 billion.

  

In the half-year BHP spent US$5.9 billion on development projects, three involving oil and gas and one iron ore. BHP spent the bulk of that, US$4.8 billion, on its Western Australia Iron Ore Rapid Growth Project 5.

 

Cash flow during the half-year hit a record US$13.1 billion.

 

On news of the financial results BHP’s share price gained US$1.31 to close at $39.01.