Bullish BHP Billiton surprises with big first-half profit

BHP Billiton has delivered a bumper first-half profit report, beating expectations with an eightfold rise in earnings.

BHP chief Andrew Mackenzie. Picture: Aaron Francis.

BHP Billiton has delivered a bumper first-half profit report, beating expectations with an eightfold rise in earnings as commodities prices rebounded from the depths of a post-boom slump and the company’s productivity drive continued to deliver.

But chief executive Andrew Mackenzie moved to temper expectations of any excessive shareholder returns in six months, with the miner saying it would continue to pay down its debt pile in the face of the rising threat of protectionism under US President Donald Trump.

There are also signs of second-half headwinds in the form of costs and reduced copper production because of strikes at the giant ­Escondida mine in Chile.

BHP delivered a $US3.244 billion ($4.226bn) underlying first-half profit, up from $US412 million a year ago and beating expectations of $US3bn as iron ore prices rose 28 per cent, coking coal prices lifted 118 per cent and BHP shaved an extra $US1.2bn from its costs.

Statutory net profit of $US3.204bn was up from a $US5.6bn loss a year earlier, when big impairments were booked on the company’s US shale assets.

The company declared a US40c-per-share interim dividend, fully franked for Australian shareholders. This was US10c higher than the minimum payment under the company’s policy of paying back at least 50 per cent of underlying earnings to shareholders.

Mr Mackenzie said it was a very strong result.

“Prices have had a role to play but we’ve been working for this for several years in a considered and deliberate way to drive higher productivity and safety through the redesign of our portfolio and our operating model and our culture,” he said.

“This has positioned us to take full advantage of this period of higher and more stable prices.”

The dividend payment, under the company’s payout ratio policy that last year replaced its progressive dividend policy, was a strong signal of the company’s commitment to provide strong returns to shareholders, Mr Mackenzie said.

The company’s British shares were up 1.8 per cent in early trading last night, compared with a 1 per cent gain in dual-listed rival Rio Tinto.

BHP said it had reduced its net debt from $US26.1bn at the end of June last year to $US20.1bn at the end of December, reducing gearing from 30 per cent to 24 per cent.

With global uncertainty increasing, the company said its bias towards reducing debt remained, something it illustrated with the announcement yesterday of a $US2.5bn bond repurchase plan.

“There has been quite a marked rise in geopolitical uncertainty, but perhaps more seriously protectionism, which on the whole blows most people an ill wind because it has the potential to inhibit international trade ... and that will weigh on business confidence and ultimately restrain job creation and investment,” Mr Mackenzie said.

“While there may be some short-term winners from some policy of protectionism and increased trade wars, most of us will be losers, and the future demand for our products could suffer if that were to spread,” he said when asked what aspects of policy were behind the company’s newly stated uncertain outlook on the US economy.

Mr Mackenzie said the strong outlook for China had not changed and the trend in Asia was towards increasing free trade.

Arnhem Investment Management managing partner Neil Boyd-Clark said the result was solid, with a payout ratio similar to that delivered by Rio earlier in the month and encouraging cash generation and debt repayment.

But he questioned what he saw as a lack of focus on developing growth options from BHP and the broader industry.

“All the conversations you have with miners is about debt ­reduction and returning cash to shareholders,” Mr Boyd-Clark said. “The focus on cash returns has probably gone too far ... they have done a good job of reducing their capital and operating expenditure, but I do question whether the capital expenditure cuts will compromise production down the track.”

After three years of steady cost-cutting under Mr Mackenzie, BHP delivered a surprise, if slight, increase in cost guidance for its West Australian iron ore and Queensland coal operations — its two strongest earners in the first half.

At WA iron ore, where underlying first-half earnings before interest, tax, depreciation and amortisation rose 47 per cent to $US4.16bn, cash cost guidance was tweaked from $US14 a tonne to “less than $US15”.

At Queensland coal, which drove a more than tenfold increase in underlying coal EBITDA from $US155m to $US2.011bn, cost guidance rose from $US52 a tonne to $US54.

BHP said production guidance from its Santiago-based copper unit, where EBITDA rose from $US829m to $US1.744bn, was under threat from a strike at ­Escondida.

The Houston-based petroleum unit was BHP’s only business where operating earnings fell, with EBITDA down from $US2.2bn to $US2bn.

Citi analyst Clarke Wilkins said the guidance changes, along with an increase in capital and exploration expenditure guidance from $US5.4bn to $US5.6bn on the back of increased oil exploration, could result in earnings and cashflow downgrades. “We expect mid-single-digit per cent downgrades to 2016-17 consensus earnings expectations, driven by higher costs and possibly lower Escondida production,” Mr Wilkins said.