BHP profit surges on commodity prices, dividend increased

BHP Billiton has delivered a dramatic turnaround in first-half profit, lifting its dividend amid higher commodity prices.

BHP chief executive Andrew Mackenzie. Picture: Aaron Francis/The Australian

BHP Billiton has cleared market estimates for profit in the first half, with the rapid late-year surge in commodity prices driving a better-than-expected payout for shareholders and supporting a strong reduction in debt.

It came as the group largely retained its full-year production and cost guidance, although a strike at its giant Escondida project has forced a review of its copper forecasts and West Australian iron ore costs have been pressured by a rising Australian dollar.

The group’s underlying profit increased more than sevenfold to $US3.24 billion, from $US412 million in the corresponding period last year.

The figure topped analyst projections for a reading of $US3.14bn.

For the six months to December 31, the mining giant logged a net profit of $US3.2bn, a dramatic swing from last year’s corresponding $US5.7bn loss.

The result included a further impairment of $US155 million tied to the November, 2015 Samarco dam failure in Brazil.

“This is a strong result that follows several years of a considered and deliberate approach to improve productivity and redesign our portfolio and operating model,” chief executive Andrew Mackenzie said.

“Our steadfast commitment to this plan has positioned us to take full advantage in a period of higher prices.”

The immediate bounceback comes after it booked a record full-year loss of $US6.39bn in fiscal 2016, with last year’s performance hampered by heavy writedowns of its troubled Samarco iron ore joint venture and its US onshore gas assets as well as a multi-year trough in commodity prices.

The pricing cycle took a turn for the better in the second half of calendar 2016, as borne out by BHP’s results today.

Among the major turnaround commodities have been iron ore and copper, with the former reaching a new 2.5-year peak of $US92.70 a tonne overnight and the latter jumping 30 per cent over the past year.

Mr Mackenzie today expressed rising optimism in prices, with the worst of the bear market seemingly in the rear-view mirror.

“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,” he said.

The company looked to temper expectations on the recent rally in the iron ore price, however, tipping near-term weakness as more supply comes online and Chinese demand growth tails off.

“The market is likely to come under pressure in the short-term from moderating Chinese steel demand growth, high port inventories and incremental low cost supply,” the miner said.

The mining behemoth also reported $US1.2bn of additional productivity gains in the first half, placing it on track to reach its full-year target of $US1.8bn.

This may be called into question should a strike at its Escondida mine in Chile – the world’s largest copper mine – continues for much longer.

BHP was cautious on the outlook for copper production in light of the Escondida issues.

“Total copper production guidance for the 2017 financial year is under review as a result of ongoing industrial action,” the company said.

The miner retained its production forecasts for iron ore, although it warned on higher costs due to unexpected strength in the Australian dollar.

Original guidance had pointed to WA iron ore costs of $US14 a tonne, but this will now likely be closer to $US15, the report suggested.

“Unit costs for the 2017 financial year are now expected to be less than $US15 per tonne as a result of unfavourable exchange rate movements,” the statement read.

Investors have also been keeping a close eye on its debt load, with the miner noting a reduction of around 23 per cent through the half-year.

It closed December 31 with net debt of $US20.1bn, as against $US26.1bn on June 30, 2016 thanks to an improvement in free cashflow to $US5.8bn.

The activity reopens the door to M&A activity, according to Mr Mackenzie.

“Strict adherence to our capital allocation framework has maximised the use of this cash … with net debt falling sharply,” he said. “As we further strengthen the balance sheet our ability to invest counter-cyclically will only be enhanced.”

But Mr Mackenzie also reminded the miner doesn’t need to pursue acquisitions for growth.

Meanwhile, the miner announced a bond repurchase plan worth up to $US2.5bn, funded by the strong cash position, to boost its capital structure.

The company weighed in on the global growth outlook, noting political uncertainty could hurt trade and business confidence.

Its view on China remains unchanged with a moderation in growth anticipated.

It is, however, more wary on the US as the Donald Trump presidency gets into full swing.

“The outlook for the US economy is uncertain,” the company said.

“The policy platform of the new administration points to a higher inflation environment than previously envisaged. The medium-term impact on growth is unclear, notwithstanding infrastructure-related announcements, especially in the context of tighter financial conditions.”

BHP’s senior executives met with the controversial Mr Trump last month on the heels of commentary from the company that urged him to walk away from tough talk on trade tariffs and his plans to roll back of climate change policy.

The company said the talks had been “productive” without elaborating on any specifics.

“They discussed a wide range of subject areas, including the global resources sector, and BHP Billiton’s investment in the US,” the company said in a brief statement at the time.

“The company looks forward to working with the new administration.”

BHP declared an interim dividend of US40c a share, ahead of market forecasts for 31c and well in front of last year’s 16c payout.

The company noted the dividend would have been US30c had it opted to payout its minimum target of 50 per cent of profits.

“In recognition of the importance of shareholder returns and confidence in the company’s performance, the board has determined to pay an additional amount of 10 cents per share,” Mr Mackenzie said.