David Stringer Melbourne
BHP BILLITON reported better-than-expected first-half earnings as it set out plans to cut project spending to the lowest since 2010.
Underlying profit was $5.4 billion (R62.9bn) in the six months to December from $7.8bn a year earlier, Melbourne-based BHP said yesterday. That beat the $4.9bn average of five analyst estimates.
Mining companies are cutting spending on projects and exploration by $20bn this year, according to Macquarie, as they scale back growth plans amid waning prices. BHP’s spend in the year to June will fall to $12.6bn, 15 percent below its initial estimates, while outlays will be trimmed to $10.8bn in financial 2016, the lowest in six years.
“The cut to capital expenditure is a massive mover, and much bigger than the market expected,” Evan Lucas, a market strategist at IG, said. “It will be another year of the efficiency drive. The way they can drive their profit forward is by continuing to cut debt and cut costs.”
Project spending had been forecast to fall to $11.5bn in the 12 months to July 2016, according to the average of 18 analyst forecasts.
Rival Rio Tinto’s capital expenditure will fall to less than $7bn this year, the lowest since 2010, the London-based producer said on February 12. Fortescue Metals said in November it would halve its full-year spending plans.
BHP rose 2.9 percent to $33.06 at the close in Sydney, extending its advance this year to 13 percent. Iron ore, BHP’s highest earner, has fallen 47 percent in the past year, and traded at $61.20 a ton on February 9, the lowest on record dating back to May 2009.
Prices would remain subdued over the medium term, as new seaborne supply outpaces demand, chief executive Andrew Mackenzie told investors and analysts yesterday at a briefing.
Rising availability in China of scrap steel would weigh on iron ore demand in the longer term, he added.
A Bloomberg index of 22 commodities, which includes copper and nickel futures, dropped on January 29 to the lowest since August 2002 amid weaker growth in China.
Shale spending
BHP, which raised its dividend 5.1 percent, said its plan to hive off about one third of its operations into the planned South32 demerger would represent an effective additional cash return to holders. Rio on February 12 announced a $2bn share buyback, while Glencore is carrying out a $1bn programme.
The company, the biggest overseas investor in US shale, will trim spending on drilling and development in the unit to $2.2bn in the year to July 2016, from $4.2bn in the 12 months through June.
While oversupply of crude oil will persist in 2015, the “supply response required to rebalance the market is under way”, BHP said. It’s cutting the number of operating rigs in its US onshore operations to 16 from 26 by July.
Net debt fell by $837 million to $24.9bn as of December 31, the producer said. – Bloomberg