Worst over for BHP Billiton after a record loss

BHP has logged its worst ever loss due to price falls, impairments on US shale assets and the fatal dam-burst.

Andrew Mackenzie, chief executive of BHP Billiton. Picture: Aaron Francis

BHP Billiton (BHP) has logged its worst ever loss and one of the biggest in Australian corporate history, as price falls, impairments on US shale assets and the fatal dam-burst at its half-owned Samarco operations in Brazil left it with a $US6.39 billion ($8.27bn) full-year loss.

This was accompanied by the big miner’s worst underlying profit in 16 years, down 81 per cent, and its lowest dividend since 2005, showing the extent of China’s slowdown and the fall in commodity prices.

But with most of the bad news already factored in by the market, the worst may be behind the world’s biggest miner, which delivered a better than expected underlying profit and flagged a doubling of free cash flow if commodities prices hold at current levels.

“We are clearly very disappointed with this result. However, the underlying performance of our business, because of our focus on safety and productivity, remains and is getting stronger,” BHP chief Andrew Mackenzie said last night.

“In 2016-17 we expect volume growth of 4 per cent (excluding US shale, which will be dependent on oil and gas prices). We expect unit costs to fall by a further 12 per cent and that we will unlock further productivity gains of $US1.8bn in our operations.”

At current prices this would deliver $US7bn of free cash flow, up from $US3.4bn in the 2016 ­financial year, he said.

Stripping out exceptional items, BHP reported a full-year underlying profit of $US1.215bn, down from $US6.4bn a year earlier because of sliding commodity prices. Analyst expectations had averaged about $US1.1bn.

BHP’s full-year statutory loss reversed a $US1.91bn net profit the previous year.

Of the $US6.4bn loss, $US7.65bn was due to previously announced after-tax impairments on US shale ($US4.8bn), the Samarco dam failure that killed 19 people ($US2.2bn) and tax provisions, including expected money owed to the Australian Taxation Office ($US570 million).

Aberdeen Asset Management’s head of Australian equities, Robert Penaloza, said the underlying earnings were ahead of Aberdeen’s expectations thanks to a stronger than expected cost performance. “BHP have managed through a turbulent ­period reasonably well, focusing on costs and efficiencies,” Mr Penaloza said. “However, much of the cost-out story is behind them now, and a recovery will depend on commodity prices. If prices were to take another leg down, the outlook would be challenged.”

Of BHP’s four key businesses, all but iron ore, which was by far the best-performing, beat what were very low market expec­tations.

The Houston-based petroleum business, acquired for $US20bn in 2011, logged an underlying loss before interest and tax of $US537m, down from earnings before interest and tax of $US1.99bn a year earlier. Copper earnings before interest and tax were down 69 per cent to $US1.04bn, iron ore EBIT fell 46 per cent to $US3.74bn and coal’s EBIT of $US349m compared to EBIT of $US348m a year earlier.

BHP declared a final dividend of US14c per share, fully franked for Australian shares, bringing the full-year dividend to US30c.

This was the lowest in 11 years and down from $US1.24 a year earlier, reflecting the abandonment of the company’s progressive dividend earlier this year to bolster its balance sheet and retain its single-A credit rating.

Mr Mackenzie said it was too early to call a bottom for commodities markets, but he gave hope that the worst could be over and that shareholders could expect bigger returns this year. “There is some sense that prices have stopped falling, as opposed to being in free fall,” he said.

“When you combine that with the phenomenal job we have done in substantially increasing our productivity (more than halving our unit costs in the past three to four years), that pause in the price fall means we can now continue to drive down costs and open a margin we can share, not only with customers, but with investment in our company and with investors.”

BHP’s net debt increased by 7 per cent to $US26.1bn, disappointing analysts, who had expected the company to pay down an extra $US1bn.

Mr Mackenzie said net debt, as far as the ratings agencies were concerned, had fallen, but that accounting standards related to switching fixed-rate debt to variable had meant reported net debt had not.

He said the balance sheet was “fit for purpose” indicating he did not feel great pressure to quickly deleverage and providing hope more of the free cash flow could be channelled to dividends.

Aberdeen’s Mr Penaloza said that after scrapping its progressive dividend policy, BHP now appeared to have adequate balance sheet strength and flexibility to cope with even weaker commodities prices.

“As conservative, long-term investors we are comforted to see the board and management being prudent to conserve cash and maintain a strong balance sheet,” he said.

On Samarco, Mr Mackenzie said the results of an external investigation into the failure of the tailings dam should be released “in the coming weeks”.

Elsewhere, he said the company’s struggling nickel operations in Western Australia, where there has long been speculation of closure, were cashflow positive in the second half of the financial year.