More on BHP Billiton
BHP Billiton
BHP Billiton, a diversified miner, reported solid growth in turnover and operating profit in the first half of the 2005 financial year. For the six months to December 2004, turnover was up 41.6% to US$ 15.5bn, and EBITDA (pre-exceptional) was up 66.6% to US$5.2bn.
Higher commodity prices were the main driver of BHP Billiton’s turnover and profit growth. Pre-exceptional EBIT was up 90% as depreciation moved up by only 3.1% from the comparative period, which explains the difference in the growth rates of EBITDA and EBIT. Increases in commodity prices added US$3.0bn to EBIT, volumes added US$150m (at 2003’s margins), but exchange rates reduced EBIT by US$ 340m. Costs increased by US$600, about 40% of it was due to higher price related costs (such as royalties), while 18.3% was due to inflation, the balance was due to higher operating and raw material costs. The increase in commodity prices dwarfed the increase in costs.
A fall in BHP Billiton’s production of oil and condensate (mainly a mixture of pentanes and heavier hydrocarbons) was partially offset by an increased production of natural gasses. Total first half production was down 8% mboe, but second quarter production was up 5% from the first quarter. Oil and condensate production was lower due to natural field decline, higher downtime and a sale of assets in Bolivia (in February 2004), which was partially offset by newer production. Petroleum generated 21.4% of the first half’s EBIT. The price of oil per barrel was up 52.6% and natural gas prices were up 24.1% which explains the 51% increase in the first half EBIT.
BHP Billiton’s base metal (24.5% of EBIT, +212% from the comparative) production was up. There was double digit production growth in copper, lead, gold and silver, but zinc production fell 53% in the first half. Copper production was up largely as a results of better head grades. Copper prices increased by 52.1% which drove the increase in EBIT.
Production of most types of carbon steel (23.7% of EBIT, up 99.1%) was up, again by double digit percentages, except for metallurgical coal, which was up a good 8%. Iron ore production was up as BHP Billiton increased capacity from several expansion projects. Higher commodity prices and higher volumes increased EBIT. BHP Billiton will benefit from further agreed price increases, starting from 1st April 2005.
Aluminium (10.8% of EBIT, up 49.2%) production was up 15%, benefiting from an expansion in South Africa. Stainless steel (8.0% of EBIT, up 76.1%) material production was mixed with nickel production down 3% (due to a planned shut down) and ferrochrome production was up 8%. Increases in commodity prices drove the increase in profits with aluminium prices up 19.7%, nickel prices up 35%.
BHP Billiton shares trade at a prospective PE× of 16.7 (at 751p), in line with the sector as is the 1.9% yield.
BHP Billiton will benefit from higher commodity prices, underpinned by the continuing long term demand growth from China. The prevailing prices encourages miners to increase production, which may leave the industry with overcapacity if the Chinese economy makes a hard landing. The Chinese government is trying to slow down growth (hoping for a soft landing), which may reduce total demand; Nonetheless BHP Billiton appears optimistic on fundamentals (low inventory levels) . Overall BHP Billiton’s medium term prospects are good.
BHP Billiton will acquire Australian miner WMC Resources for US$ 7.3bn. The acquisition will be funded by debt, hence there will be no dilution of ownership. The offer price is 12% higher than Xstrata’s offer. The acquisition increases BHP Billiton’s exposure to nickel and copper and provids an entry to uranium. BHP Billiton expects to increase WMC profitability by better management of assets and cost cuts. As it is, BHP Billiton plans to save US$91m per annum through “corporate cost efficiencies”.
Random picks: Body Shop | Cable & Wireless | Crest Nicholson | Easyjet | GUS | HMV | N Brown | SIG | Smiths | Wellington Underwriting