IG Markets on BHP Billiton: Operational efficiencies unlikely to offset commodity slump

By Shaun Murison

BHP Billiton, the world’s largest mining company, is expected to release interim results for the six months ending December 2014. The company has guided via an operational review the following production and average realised price changes for the period:

A quick glance at the production level changes, relative to the average price changes, draws the obvious conclusion that interim results will be significantly weaker against the backdrop of the prior year’s comparative. Iron ore, copper, petroleum and coal together make up the core assets of the business and the overwhelming bulk of group revenue. Iron ore will have the most material impact on profit. The steel making ingredient accounts for around half of the groups underlying Earnings before Interest and Tax (EBIT) and has recorded the largest drop in average realised prices over the six month period.

BHP Billiton has however proven to be proficient in its ability to improve operational efficiencies to offset costs. The extent to which these cost reductions will help mitigate the aggressive slump in commodity prices (particularly in oil) is questionable over the interim period, although these efforts will perhaps be more material over the remainder of the financial year. Group CEO, Mr Andrew Mackenzie, has guided that plans are to reduce the amount of oil rigs in the U.S., by as much as 40% over the course of the year with the aforementioned aim in mind.

The performance of non-core assets (Aluminium, Manganese, Nickel etc) although less consequential to group earnings, will be of particular interest ahead of Billiton’s planned demerger of these assets. BHP Billiton is planning to list the new company, South32, by June 2015 with pending a shareholder vote in May 2015. A relatively robust performance in non-core operations could incite further investor appeal and interest ahead of the proposed spinoff.

BHP Billiton’s has remained committed to a progressive dividend policy in the past, with the current yield sitting at around 4.5%. The decline in earnings will draw concern around a possible reassessment of the dividend commitment. To honour the progressive yield policy, the company may need to delve into the balance sheet or reduce capital expenditure further.

Sales for the first half of the financial year are expected to be realised at $34.511b, with adjusted earnings per share anticipated 37.5% lower at 91c (US). A Thompsons Reuters poll of twenty six surveyed analysts have an average rating of buy for BHP Billiton.

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