BHP's solid interim

After a day of market ups and downs, the bears finally won out with their negative judgment on the BHP Billiton interim result, and the shares finished down one cent at $29.77. That was after being up 58c to a day's high of $30.45 and a low of $29.40, a trading range of 95c. Some investors focused on the solid nature of the result: huge cash flows, large (in size) interim operating profit and a reasonable net result of a 2% rise when the rest of the industry is looking at profit falls or worse (such as BP and Shell in the 4th quarter). The bears though worried that the sheer quality of the result wouldn't be repeated and that the company faced greater price pressures this half as high iron ore and coking coal prices get sliced by struggling buyers in China and Japan in particular. But the world's biggest mining group underlined the enormous strength of its balance sheet (compared with debt-strapped rivals such as Rio Tinto, Xstrata and the like) when it said that cash flows of US$13.1 billion in the opening half year had reduced gearing to less than 10%. As well the company made it clear shareholders would benefit from the upsurge in income for the second six months in a row, with interim dividend being boosted by more than 40% to 41 USc a share from 29c a share in the first half of the 2008 financial year. That was the same as the final for 2008. That means shareholders who had stuck with the company through calendar 2008 would have received a combined final and interim payout of 82 USc a share, which is more than the 72.7c a share paid out in the 2008 financial year. Whether the final for this half will equal 2008's 41c is another thing. Perhaps we shouldn't bet on it from this comment from the CEO. "We've decided not to lift the dividend further from where it was in the last half, consistent with our outlook that was uncertain,'' chief executive Marius Kloppers said in a conference call. "The further outlook is continuing to be weak, uncertain and volatile. Demand for our products has softened globally.'' Underlying earnings were reported at $US6.1 billion (or $A9.4 billion), but including an unexpected loss in its copper division and losses in its nickel division. Analysts had expected BHP to report first-half underlying earnings of $US6.9 billion. Comments by UBS analyst Glyn Lawcock typified the stance of those who were not fully pleased when he was reported by AAP as saying the headline number came in below expectations but the overall result was "solid given the current environment. The big disappointment was probably base metals,'' he was reported as saying. But in a statement to the Exchanges, BHP made the following points on the result which summed up its underlying quality. Underlying EBITDA up 25% to $US13.9 billion Underlying EBIT up 24% to $US11.9 billion Attributable profit (excluding exceptionals) up 2% to $US6.1 billion Robust cashflow of $US13.1 billion, up 74% Earnings per share 110.1 US cents, up 3% Interim dividend of 41 US cents, up 41% on last year Continued Balance Sheet strength -Net gearing at 9.5% Short term focus on: Maximising cash generation from existing businesses Prudent and disciplined growth Long term strategy unchanged Strongly positioned for this point in the cycle Some investors worried about the confidence of CEO, Marius KloppersHe said that strength put the group in a privileged position to buy international mining assets "as others falter" and BHP had made no secret of its interest in buying joint venture projects it operates with Rio Tinto, such as Rio's stake in the huge Escondida copper mine in Chile. "We have the relative luxury to continue to plan for the long term while not being forced into short term decisions that can be damaging for the company," Mr Kloppers saidBHP revealed additional write-downs beyond the impairments to its Ravensthorpe nickel laterite and Yabulu nickel refinery expansion projects which had already been announced, lowering its net profit 56.5% to $US2.6 billion, from $US6 billion in the first half last year. The miner took $US508 million of impairments for its rehabiliation obligations on the Newcastle steelworks and $US356 million on its withdrawal from Suriname aluminium operations, the closure of its Pinto Valley copper mine in the US and the write-down of the Corridor Sands mineral sands project in Mozambique. BHP's earnings are set to fall this year for the first time in a decade as oil and metals prices have slumped and demand for metals has died away as end users and their customers slash production worldwide. (Japanese, US and European car and whitegoods industries, and China's construction sector). Mr Kloppers said cash flow was extremely robust, positioning it well to cope with the economic downturn. However, all operations were under continuing review and the miner would take action if markets worsened. The company's balance sheet is light on for debt with that low level of gearing, against Rio Tinto's burden of almost $US40 billion. BHP isn't looking to sell assets, like Rio has done twice in 18 months without much success, nor has it turned to a big shareholder, and a Chinese one in that, for cash, deals and support rather than face shareholders with a deeply discounted rights issue that would generate a lot of heat. But it has managed to weather the first stage of the storm and emerge in good shape. There's still a long way down for the company and its earnings in 2009 as reality sinks in. --Australasian Investment Review (AIR).