Terry McCrann: Iron ore: BHP Billiton’s ‘big bank’

AT the crazy peak of the boom, BHP Billiton was, very briefly, a “four-bank” resources giant and easily our biggest company by almost any metric, writes Terry McCrann.

The BHPB of today is a much bigger company in terms of what it actually produces.

AT the crazy peak of the boom — running at the same time both in China and down south of the good ol’ US of A — BHP Billiton was, very briefly, a “four-bank” resources giant and easily our biggest company by almost any metric.

Now, post boom, while it’s no longer our biggest company — that mantle’s been passed to a, surprise, surprise, bank, the Commonwealth — it’s settled down into being a much more sustainable “two-bank” giant.

Although, when and if the property boom goes bust, it could go back to being our “four-bank” biggest once again.

Let me explain. Back in 2011 BHPB posted a thumping, staggering, profit of $US23.6 billion. Because back then the Aussie dollar was running hot, above parity, that translated to “only” $22.6 billion down under dollars. Don’t cry for me, China.

Nevertheless, that figure came close to equalling the $24.3 billion that the four big banks earned in total that year. And if you used today’s much lower exchange rate, BHPB’s 2011 profit would translate to a mind-boggling $31 billion.

That though is in “if wishes were fishes ...” or “if my grandfather had been my grandmother ...” territory.

The drivers that gave BHPB a huge profit back then were of course the same drivers that gave us an Aussie above parity.

Post boom, while BHPB is no longer our biggest company, it’s settled down into being a much more sustainable ‘two-bank’ giant.

Just as the same drivers that have given us an Aussie in the mid-US70c are the same ones that produced BHPB’s much lower profit of today.

What we saw on Tuesday was an annualised profit of a more subdued, but critically, very sustainable — and still, very healthy — $US6.5 billion. Which at today’s equally more subdued, but also much more sustainable US76c exchange rate, would translate to $8.6 billion.

That’s somewhat less than the total of what two of the four big banks will earn this year, at the top of THEIR (property) boom. Indeed, to be more accurate it’s more like a “one-and-a-half bank” profit.

And just to finish off the calculations, by the by, at 2011’s exchange rate BHPB’s $US6.5 billion annualised profit would shrink to “just” $6.1 billion. That’s “one-bank” territory.

Yet the BHPB of today is a much bigger company in terms of what it actually produces compared with the somewhat flabby boomtime.

And thanks to current CEO Andrew Mackenzie who’s spent those five years as BHP’s “personal trainer”, whipping it into shape, it produces everything far more cheaply.

So yes, it’s getting lower prices, but it’s getting those lower prices across generally higher volume sales and off, again generally, lower per tonne output costs. Especially in iron ore.

The company’s core, like that of its biggest and closest rival Rio Tinto, remains in the Pilbara. That iron ore business is in a sense BHPB’s own “in-house big bank”, churning out the cash like a CBA pockets home-loan repayments.

BHP Billiton chief executive Andrew Mackenzie has spent five years whipping BHPB into shape. Picture: Claudia Baxter

In the half iron ore generated $US6.9 billion of revenue. While that was only 37 per cent of group revenue, iron ore’s operating profit (EBIT) of $US3.2 billion was actually nearly 54 per cent of group EBIT.

That near 50c of operating profit in the revenue dollar was a pretty stunning performance when the iron ore price averaged just $US55 a tonne.

Two points to make about that. A $US55 iron ore price makes BHPB a very nice profit — and pours company tax revenue into Treasurer Scott Morrison’s Budget. But his Budget will remain — tens of billions of dollars — deep in deficit. The difference tells you a lot about why the private sector works — and pays the bills, while the public sector just takes that money and spends it.

While the petroleum business earned about half the revenue of iron ore at $US3.3 billion, its division EBIT was not much than one tenth, at just (no quotation marks this time) $US360 million.

The reason is that BHPB’s US shale oil chews up a lot of amortisation. Unlike conventional petroleum, shale requires a lot of sustaining capex — indeed it’s almost operational expenditure.

THAT’S another difference which makes iron ore much more “bankable”. Yes, the “DA” between EBITDA and EBIT is cash in both divisional cases; it’s just that most of petroleum’s “DA” has to be poured straight back into sustaining the shale output. Not quite so with iron ore.

Now BHPB’s average realised price for oil was just $US45 a barrel, with relative prices cascading down from that for conventional Aussie LNG, and then cascading down for US shale gas.

The latter is still very cheap for US customers (unlike Aussie gas customers) and marginal for BHPB. The US shale name of the game remains oil.

But the higher, $US50-plus, oil price will flow nicely into the second-half numbers. However, that will also quickly bring more shale back on line, capping any upside for both oil and gas, both US domestic and global.

Copper’s interesting. Some $US4.2 billion of revenue threw off just $US914 million EBIT. But that looked good compared to Rio where a similar $US4.5 billion of revenue produced essentially zero EBIT. Even though both divisions are based on the same mine: Escondida.

The reason is that Rio has “other” copper and some of that is not doing well. Its Escondida was very profitable — over 50c of gross profit in the revenue dollar.

And it has a copper upside differential compared to BHPB; or at least both management and shareholders hope: Oyu Tolgoi in Mongolia.

But then, it has been promising a “lot of upside” for quite a few years now.

The real ‘value add’ Anna Bligh brings to the bankers’ role is inside the Labor Party not the government backbench.

MUTINY ON BLIGH

FURTHER to my comments on Tuesday about the backbench mutiny over our 21st century “admiral” Bligh, named Anna not William.

Both the reaction to Treasurer Scott Morrison’s comments to Sydney radio’s Ray Hadley and the woeful ignorance displayed by the media hysteria took the stupidity to a new level.

It comes down to this: Bligh is “hired help”.

She has a very specific job to do and — no offence intended — it’s at a pay grade somewhat below that of Morrison. And of Prime Minister Malcolm Turnbull for that matter.

When Morrison told Hadley last Friday that he wasn’t going to meet Bligh, he should have been telling Hadley the bleeding obvious.

Sometimes, I might note, that can be a bit difficult, unless it involves a bit of League biffo.

Morrison wasn’t going to talk to Bligh not because he wanted to snub her because of her Labor Party background; but because he wouldn’t talk to her even if she’d been a former Liberal state premier.

Just as he didn’t talk to her predecessor, former line banker Steve Munchenberg.

If Morrison wants to “talk to” the banks, he calls their CEOs, either individually or as a group.

His office might talk to Munchenberg/Bligh but only to get info, data and insights.

The role of Munchenberg/Bligh is to take the banking case to a wider audience; including yes, those generally risen-without-trace (both sides) backbenchers. And arguably also Opposition front benchers.

Yes, bank CEOs will talk directly to the Opposition Leader and shadow treasurer; as they might actually walk into the big offices one day.

But usually “unsummoned”.

Setting aside “big picture issues” like the way she helped blow the Queensland Budget — not exactly a rare thing for treasurers to do — Bligh clearly has lobbying/marketing ability.

She did win an election, albeit on her predecessor’s coat tails and against inept opposition.

But the real “value add” she brings to the bankers’ role is inside the Labor Party not the government backbench.

Originally published as Terry McCrann: Iron ore: BHP Billiton’s ‘big bank’