By Andrew Main
BHP chief executive Andrew Mackenzie’s much reported “laser-like focus on costs” has paid off handsomely, with last night’s half-year earnings report reflecting a turnaround from a $US5.6 billion loss in 2015 to an equivalent $US3.2 billion net profit for the half just ended.
BHP is, in his words, the world’s biggest diversified resources company.
He was quick to thank the recovery in bulk commodity prices for much of what he described as “a very strong set of results”, but made a clear case that much of the good news came from a reduction of 40% in the resources giant’s unit cost of production over the last four years.
Revenue was certainly up, but only by 20%, compared to what the company called a 157% lift in net profit.
The big news for Australian investors was that the fully franked interim dividend will be US40c, to be paid out of the company’s $US5.8 billion of free cash flow. Basic earnings were US60c per share, versus a loss of more than $US1 a share previously.
That outburst of largesse should give the shares a push this morning, as it is US10c above the 50% payout ratio level that the company uses in its calculations, and which the analysts feed into their models.
Looking closely at the numbers, the company claimed that its underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of $US9.9 billion represented an EBITDA margin of 54% for the latest half, up from 40% previously.
Net debt was down from $US26 billion six months ago to to $US20.1 billion. $US2 billion of that improvement came from a mix of lower interest rates and exchange rate benefits.
That US40c dividend, which will be paid to shareholders on March 28, is a dramatic improvement on that very nominal US16c paid out the year before, which incidentally came shortly after the Samarco dam disaster in Brazil in November 2015.
But it’s certainly not breaking new ground. The company paid out US62c a share in early 2015 and US59c in early 2014, back in the salad days when it looked as though the resources boom wasn’t ever going to end.
Much of yesterday’s positive news was telegraphed in the upbeat half-year production report in late January, which saw a record half year iron ore output of 118 million tonnes from the company’s Pilbara operations.
Coking coal output was also up slightly at 21 million tonnes but the real gusher was the more than doubling of the price being paid for the commodity.
For instance, the average sale price of hard coking coal was up from $US82 a tonne to $US179 , and iron ore enjoyed a 27% rise in price from $US43 a tonne to $US55, half on half.
It wasn’t all beer and skittles. Copper’s under a cloud as there’s been strike happening at the 57% BHP owned Escondida in Chile since February 9, where incidentally a worker lost his life during the latest half, sullying a good safety record.
On the plus side, a rejig of the low-cost sulphide leach pad at Escondida allowed the company to claim $US1.2 billion in productivity gains and it looks to claim a total of $US1.8 billion altogether for the year from that project as long as the recently declared strike ends soon.
Copper volumes were also down at Olympic Dam in South Australia, while BHP’s global oil production dropped 15% in the half as fields declined and the company held off developing new acreage in the US because of last year’s low oil price.
A buoyant Mr Mackenzie was upbeat about the oil price thanks to the recent decision by producer cartel OPEC to cut back on production, although he was more cautious about how long the sharp lift in Chinese steel demand is going to last.
“There is probably a little more risk to the downside in iron ore,’’ he said, although he dismissed a suggestion that there’s a debt bubble in China due to burst any time soon.
He revealed he’d done his bit to push the climate change issue during a recent one-on-one conversation with new US president Donald Trump.
“I spent most of the time talking to him about resources, as the world’s biggest diversified resources company,’’ he said.
“We discussed some of the issues around coal and climate and carbon,’’ he said, adding that BHP maintains what he called an “enduring” support for the Paris Agreement on climate change.
None of that sounds like the Trump view of the world but he wouldn’t be drawn on POTUS’s response to his comments.
“I’ll leave you to ask him about that,’’ he dodged, after noting that the climate conversation needs to be had.
He told journalists that “free trade is a very strong driver of economic growth in the medium to long term,’’ and that “protectionism blows most people an ill wind,’’ not that he was claiming to have put that to the new world leader.
He played down any talk of using the positive performance to fund any big acquisitions, noting that BHP had looked at a lot of projects but hadn’t found any in the recent past to justify large scale investment.
But “we have a rich pipeline of options that are looking more and more attractive,’’ he said, inferring that the big miner won’t be keeping its powder dry indefinitely.
Disclosure: Andrew Main owns shares in BHP
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