BHP Billiton displays grace under pressure

BHP Billiton shrugs off the turmoil of damaged commodity markets, showing mettle by raising dividends.

JOHANNESBURG - 

First blush headlines on half year results to 31 December 2009 for BHP Billiton appeared to have focused on profit after tax, which increased to USD 6.2bn from USD 3bn in the comparable 2008 period. A more useful reflection of the business experience of the world's biggest diversified resources stock came by way of net operating cash flows, recorded as USD 5.7bn for the latest six months, compared to USD 13.1bn for the comparable period in 2008.

One of the main reasons for the significant contraction in cash flows came by way of a fall in trade and other receivables; the group commented that "current period cash flow was negatively impacted by increased working capital on the back of a recovery in demand and prices".

Seen at the underlying earnings before interest and tax (EBIT) level, the latest six months' number was at USD 8.5bn, compared to USD 11.9bn for the same period in 2008. While investors may take some time to digest the results of this vast group, it is instructive to note that BHP Billiton has declared a dividend of 42 US cents for the six months to 31 December 2009, an increase of a cent a share on the comparable 2008 period.

The 2009 period was, of course, noted for how even some of the world's biggest mining names suspended dividends, most famously, perhaps, Anglo American, but also Rio Tinto, and Xstrata, the other three "London diversifieds". BHP Billiton paid cash dividends of USD 4.6bn during 2009.

Given that BHP Billiton's visions and plans are more accustomed to dealing with decades, never mind years or even months, the latest results, while pleasing at the headline level, point to a period of consolidation that commenced at some point during 2009. Seen on a calendar year basis (the group's fiscal year ends on 30 June), BHP Billiton's operating cash flow for 2009 was put back to levels seen in 2005 and earlier.

The so-called commodities supercycle, which was triggered in early 2002, peaked out during a year or so between mid-2007 and mid-2008, so far as commonly seen spot prices, such as for copper, are concerned. BHP Billiton's overall cycle continued for some time, given that a substantial amount of its business is performed in terms of 12-month contracts. These started biting into cash flows during 2009, as agreed price cuts, not least for iron ore, started to gain traction. But where most spot prices for commodities that don't trade in contract markets crashed during the second half of 2008, so it was that these recovered, sometimes substantially, during 2009.

In the latest half year, BHP Billiton's underlying EBIT from its iron ore division was beaten down to USD 2.1bn, compared to USD 4.1bn for the six months to 31 December 2008. For coking coal, the number fell hugely to USD 772m, from USD 3.1bn. Manganese numbers dropped to USD 190m, from USD 1.3bn.

The most significant reversal in the other direction came from base metals (mainly copper; aluminum and nickel are separately reported), which chimed in with underlying EBIT of USD 2.5bn, compared to a loss of USD 111m for the six months to 31 December 2008.

Among the smaller divisions, there were also improved numbers from diamonds, and nickel, where the turnaround was massive. Profits from steam coal and also aluminum dropped. The overall contraction in cash flows and maintenance of a progressive dividend policy, along with significant capital expenditure programmes, saw net debt (including cash) increase from USD 4.2bn on 31 December 2008 to USD 7.9bn a year later.

While this represents a significant rise in debt in percentage terms, the numbers are relatively small for a group of BHP Billiton's size, providing loads of room for further debt raising, should that become necessary in the face of big new projects. Since 31 December 2009, BHP Billiton has approved USD 2.2bn pre-commitment capital expenditure for projects in iron ore, metallurgical coal and potash, and the approval of the Antamina expansion in Peru. Projects under development, where a total of USD 11.7bn of capital expenditure is already involved, are scheduled to start initial production within the next three years.

Over the past five calendar years, BHP Billiton has paid a total of USD 15bn in cash dividends, and returned USD 11.7bn in cash to shareholders by way of stock buybacks.

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