Profit rose a higher-than-expected 31 percent in the first half at BHP Billiton as its iron ore earnings gained and costs declined amid improving global economic growth.
Underlying profit rose to $7.8 billion (R84.6bn) in the six months to December 31, from $5.9bn a year ago, the world’s biggest mining company said yesterday. That beat the median analysts’ forecast of $6.9bn.
BHP, which increased its dividend 3.5 percent and forecast more cost savings, expected the global economy to strengthen in fiscal 2014, aided by positive sentiment in the US and Japan.
It joins smaller rival Rio Tinto Group in reporting a rise in profit after clamping down on spending to focus on its most profitable operations, including iron ore and copper.
“They have delivered the earnings number, cut their capital expenditure and are getting very attractive returns on capital [of 22 percent]”, said Peter Esho, the chief market analyst at Invast Financial Services in Sydney. “That is what adds shareholder value, and that is what the large, influential fund managers wanted to see.”
BHP shares rose 2 percent to close at R353.25 on the JSE yesterday.
Net debt was expected to drop towards $25bn by the end of fiscal 2014, enabling a possible share buyback, according to a UBS note yesterday.
“Global economic conditions improved during the December 2013 half year,” BHP said.
“The balance of risk to global growth is skewed to the upside, particularly given the broad-based alignment of macroeconomic indicators in the major developed economies.”
Mining companies are reining in spending after the decade-long boom in metal prices waned after producers boosted supply and China’s economy expanded more slowly. BHP is focusing on the highest-returning projects and plans to spend $16bn during fiscal 2014 on new projects and exploration, down from $22bn the previous year.
Rio Tinto, the world’s second-largest mining company, last week reported a 43 percent gain in second-half profit. The outlook for China’s economy and for short-term commodity demand remained positive, it said.
Iron ore is the biggest contributor to BHP’s results. The price climbed 15 percent in the second half of last year as China, the world’s biggest buyer, boosted stockpiles.
Supply of iron ore, BHP’s most profitable unit, would exceed demand growth after producers added new supply in Australia and Brazil, the company said. Earnings at its iron ore unit gained $1.7bn to $6.5bn.
“We still see some issues arising from new supply coming on,” chief executive Andrew Mackenzie said yesterday. “As we look further forward by a quarter or two, our conclusion is that there is more supply coming into the iron ore market than there is demand growth in places like China and elsewhere.”
The price has dropped 7.3 percent this year. It is forecast to decline every year until at least 2017, according to data compiled by Bloomberg. The expansion in supply – led by Australian producers – is expected to push the seaborne market into surplus this year.
“Increasing iron ore supply globally will weigh on the long-run iron ore price,” UBS analysts led by Glyn Lawcock said in a note before the earnings. “However, BHP is one of the lowest-cost producers and in our view will continue to be a very competitive player in the iron ore space.”
Analysts expect China, the mining industry’s biggest customer, to grow at its slowest pace in 24 years this year. The ruling Communist Party is trying to balance reining in a credit boom with maintaining expansion of more than 7 percent a year.
“A lot of the credit stress is actually being quite well used by the Chinese government to drive rationalisation within their industries, and also to drive environmental performance,” Mackenzie said. “Some of that actually will result in a loss of domestic supply of things like iron ore.”
BHP said its annualised cost cutting and efficiency gains totalled $4.9bn. This was expected to rise to $5.5bn by the end of fiscal 2014.
The boost in productivity led to a 9 percent increase in the margin of underlying earnings before interest and tax to 38 percent.
The copper unit’s underlying earnings before interest and tax of $2.9bn beat consensus estimates by 25 percent, according to UBS.
Its coal unit earnings rose to $510 million from $79m, while petroleum fell 16 percent to $2.5bn.
“The iron ore profit is fantastic; that is what everyone is going to talk about,” IG markets strategist Evan Lucas said. “The question will be whether or not they are worried about the sales, or worried about the fact that petroleum is a little bit softer than expected.” – Bloomberg