BHP Huge Profit and Record Dividend But Warns on Higher Costs And Global Uncertainty

Australian mining giant BHP Billiton’s June quarter earnings saw huge leaps in revenue but lagged behind forecasts. $BLT announced a record dividend however cautioned on higher cost pressures and macroeconomic uncertainties.

Australian mining giant BHP Billiton’s June quarter earnings saw huge leaps in revenue but lagged behind forecasts. $BLT announced a record dividend however cautioned on cost pressures and macroeconomic uncertainties.

BHP Ironore

Higher prices and increased volumes helped offset the impact of higher costs, unfavorable exchange rate movements, inflation and other net movements.

Earnings:

Underlying attributable profit for the year to the end of June rose to $8.9bn (£6.9bn) from $6.7bn a year earlier, but below the consensus analyst forecast of $9.27bn according to Thomson Reuters. BHPs final dividend rose to 63 cents a share from 43 cents a share, taking the 2018 annual payout to 118 cents a share. For fiscal 2018, earnings per American Depositary Share (ADS) came in at roughly $3.35, up 32% from the prior fiscal but missing the consensus eEstimate of $3.40.

Revenue for fiscal 2018 were $43.6 billion, up from $36.1 billion recorded in the prior fiscal year but missed consensus estimates of $44.8 billion. 

BHP Billiton Ltd NYSE: BHP

Market Reaction: August 21, 4:00 PM EDT 47.44 ▼ 0.86 (-1.77%)

BHP’s chief executive Andrew Mackenzie said: “We have announced a record final dividend for shareholders which reflects strong operating performance, solid prices and capital discipline … Our balance sheet is strong, with net debt now at the lower end of our target range, and our investment plans on track across iron ore, copper, coal and petroleum.”

BHP segments, 2017/18 compared to 2016/17:

  • Petroleum $US3.34 billion, up from $US3.12 billion. Revenue in conventional petroleum was up to USD5.41 billion from USD4.72 billion. For conventional petroleum, unit costs for its new financial year are guided at USD11 per barrel of oil equivalent, and in the medium term, they are USD13.
  • Copper $US6.52 billion, up from $US3.54 billion. Copper revenue was up to USD13.29 billion from USD8.34 billion. BHP said Escondida costs for its new financial yearFor financial year ending next June are guided at USD1.15 per pound of copper, and that will stay flat in the medium term.
  • Iron ore $US8.93 billion, down from $US9.08 billion. Revenue was up to USD14.81 billion from USD14.62 billion. Iron ore was boosted by better productivity and stability across its supply chain, BHP said. At its Western Australia iron ore assets, BHP guided for USD14 per tonne of unit costs, but this is a 2% drop on its recently ended financial year and the company expects the figure to fall to around USD13 per tonne in the medium term.
  • Coal $US4.40 billion, up from $US3.78 billion. For Queensland coal, BHP guides for unit costs of between USD68 to USD72 per tonne for its new financial year, but USD57 in the medium term. Costs for its recently ended financial year in Queensland rose 14% year-on-year to USD68 a tonne. Revenue in conventional petroleum was up to USD5.41 billion from USD4.72 billion, and underlying Ebitda was up to USD3.39 billion from USD3.13 billion.

Production growth for continuing operations:

  • Petroleum down six per cent, to 120 million barrels of oil equivalent due to natural field decline and the impact on hurricanes.
  • Copper up 32 per cent, to 175 million tonnes, Escondida had a 57% rise as it ramps up. Copper production guidance for its new year is for between 4% contraction and a 1% rise, with Escondida set to fall between 8% and 3%.
  • Iron ore up three per cent, to 238 million tonnes
  • Metallurgical coal up seven per cent, to a record, up 7% year-on-year, with operating conditions at its Broadmeadow and Blackwater operations improving at the end of its year.
  • Energy coal unchanged, at 29 million tonnes

Asset Sales and Debt Reduction

BHP has announced or completed the sale of more than $18bn of assets in the past six years, largely in response to overpaying for commodity assets in the previous boom. The sales have helped reduce BHP’s net debt to $10.9bn from $26.1bn two years ago. In July the company announced the sale of US oil and natural gas assets for $10.8bn to BP.

BHP warned over the potential impact of the trade wars on global growth, predicting the US would lose out in terms of its international competitiveness.

Samarco Dam Disaster

BHP recorded an exceptional loss of $650m last year linked to the failure of the Samarco dam in Brazil. The disaster at the Samarco iron ore operation in Brazil, a joint venture between BHP and the Brazilian miner Vale, killed 19 people and flooded three communities leaving people homeless. BHP has said it will defend a class action brought by investors over the disaster.

Productivity Gains

A disappointment with the latest earnings is the halving of the $2bn of productivity gains expected in the new fiscal year, although BHP pledged to make additional savings in 2020.

Balance Sheet & Cash Flow

  • Cash and cash equivalents as of Jun 30, 2018 came in at $15.9 billion, up from $14.2 billion at the end of fiscal 2017.
  • Total interest-bearing liabilities totaled $26.8 billion, down from $30.5 billion as of Jun 30, 2017.
  • Capital and exploration expenditure was $6.8 billion, up 29% from $5.2 billion incurred in the prior year.
  • As of fiscal 2018-end, net debt was at $10.9 billion, down from $16.3 billion as of fiscal 2017 end and $26.1 billion as of fiscal 2016 end.

The company intends to keep its net debt at the lower end of its targeted range of $10 billion to $15 billion.

Dividends

During the reported fiscal, the company paid dividends worth $5.2 billion compared with $2.9 billion paid during fiscal 2017. The company’s board has announced that it will pay a record final dividend of 63 cents per share. This is equivalent to a payout ratio of 69%.

Analysts Reactions

Shore Capital Yuen Low

The financials were “strong but slightly behind our expectations, particularly in relation to the bottom line”. Sees BHP’s potential ultimate liability for the burst Samarco dam in Brazil remains unclear, with the company recording a $650m post-tax hit in the results. However, Low reminded clients that there is still no provision related to the governance agreement outlined in June 2018, “so we would not be surprised to see further significant impairments come through in FY2019”.

BMO Capital Markets

Said $BLT results were “a touch light” versus estimates and flagged rising costs.

Olympic Dam copper, gold and uranium mine in South Australia

At the same time as earnings were released BHP said the mine is being affected by an ongoing technical issue. Copper production at Olympic Dam is set to reach around 230,000 tonnes by 2021, but there is potential for up to 450,000 tonnes per year.

The company spent A$600 million (about $460m) in fiscal 2018 upgrading the operation and said it was assessing the impact of the ongoing outage. The technical issue followed the failure of several boiler tubes at the acid plant, BHP said without offering an expected timeline for operations to resume.

“Remediation and mitigation activities are underway, and underground mining operations continue as normal,” BHP said. The Australian Broadcast Corporation reported,production could be disupted for up to eight weeks, though an exact timeframe is not yet known. BHP is pushing ahead with a study into a $2.1 billion expansion of the mine. The board is expected to make a final investment decision in 2020 on the project, which would lift copper production to 330,000 tonnes by 2023.

Macroeconomic Outlook

BHP expects China’s economic growth to slow slightly in 2018 and says prospects in the US are “sound”. BHP believes global trade will continue its rebound going through calendar 2018, but there is risk due to the rise in trade protectionism.

The company expects China to meet its 6.5% GDP growth rate for 2018. However, looking to the US, BHP said a rise in protectionism will hurt consumer purchasing power and competitiveness abroad. In Europe and Japan, BHP said business confidence and manufacturing may have peaked in early 2018, but nonetheless things are still “healthy”.

Source: BHP Billiton, Reuters

From a Sunburnt Country ….

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