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BHP Billiton: Full year results
BHP Billiton, the Australian mining company reported record results for the year to June 2005. The company said EBITDA rose 52.5% to US$11.4bn and EBIT rose 70% to US$9.3bn (both excluding exceptional items).
The boom in prices for iron ore and other commodities was the main reason for the spectacular growth. Production reached record volumes for 11 commodities including iron ore, metallurgical coal, natural gas, aluminium, nickel, silver, and manganese ore and alloy.
The main reason for the improved profits was higher prices which increased EBIT by US$5.6bn. Overall, higher sales volumes (measured at last year’s average margins) increased EBIT by a net of only US$110m.
Increased sales volumes of iron ore, copper, natural gas, aluminium, silver and lead contributed around US$350m, but was partially offset by US$265m of unfavourable impacts resulting from lower oil and diamond volumes. Oil volumes contracted due to natural field decline and planned shutdowns for maintenance activities.
New operations increased EBIT by US$140m, mostly from petroleum. First production from ROD (in Algeria, producing oil), the first full year of production from Ohanet (Algeria, producing oil and gas), and the start of oil production from Mad Dog (US) in January 2005.
The company is investing heavily to increase production. Eight projects were commissioned during the 2005 financial year. Total capital expenditure throughout the development phase of these projects is expected to be US$1.78bn, about 1.3% above budget. Ten further major projects (greater than US$100m) are under development with a total budgeted investment of US$5.4bn. In total, the pipeline of projects in execution or under evaluation is around US$11.9bn.
The company is reaping the benefits of booming commodity markets and while the outlook is still good, the pace of growth will inevitably slow. High oil prices and rising interest rates will take their toll on the world economy, slowing demand.
Rising costs, particularly higher fuel, labour, raw material and other operating costs which added US$775m to total costs need to be watched. These are partly due to higher levels of activity but are not directly price linked and could cause problems should markets start to slow. (Price linked costs in the form of royalties and taxes added a further US$565m but these will decline should prices fall).
The acquisition of WMC, an Australian based resource company (in March 2005) will help boost this years earnings.
The share trades at 794p, on a prospective PE (2006 earnings) of 11.8x within the sector range with a yield of 2.3%.
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