Wednesday, February 10, 2010

BHP Billiton (BHP): Good Quarter, but STILL Cautious on Global Economy

Speaking of iron ore miners...

The 3 mega miners are very similar to the railroads in that they are quite solid ways to understand what is *really* happening in the global economy, outside the confines of the general fiction that has become domestic government reports. Australian giant BHP Billiton (BHP) reported this morning and much like they said 6 months ago [Aug 12, 2009: BHP Billiton - No Quick Recovery Coming, but Cash Flow Enormous] - they remain cautious on what happens after the morphine high of massive global government stimulus wears off.

Via AP:
  • Anglo-Australian miner BHP Billiton Ltd. said its first half profit more than doubled to $6.1 billion after selling record quantities of key commodities and shedding a loss-making nickel mine.  The world's biggest miner reported a 134 percent rise in net profit for the six months to Dec. 31 -- to $6.1 billion from $2.6 billion a year earlier.  The result was inflated by the sale of the Ravensthorpe nickel mine in Western Australia state for $340 million to First Quantum Minerals Ltd. BHP closed the loss-making mine early last year
  • Excluding one-time gains, BHP Billion's net profit was $5.7 billion, down 7 percent from $6.1 billion in the first half of the previous fiscal year. That was stronger than analysts' expectations of $5.1 billion.
  • Revenue in the half fell 17.5% to $24.58 billion from $29.78 billion in the previous comparable period and the miner posted an interim dividend of 42 cents a share, in line with analyst expectations and up on the 41 cents it paid last year.
  • BHP Billiton said its result was "sound" given uncertainty in the global economy and lower prices for commodities were offset by higher volumes.
  • The company said global economic conditions had improved over the past six months, as the United States and Europe lifted industrial output from previously depressed levels and China returned to double digit growth.
  • But BHP remains cautious about the speed and strength of the global economic recovery across the developed world.  "It appears that stimulus measures that supported the recovery have not fully addressed structural issues such as weak labor markets and excess production capacity in developed economies," it said.  (amen, but the morphine sure felt great!)
  • The company said a further variable would be the impact of any measures to control loan growth in China.  "It is evident that in the short term, the Chinese government will focus on containing asset inflation," it said.  BHP said commodity markets will continue to be largely dependent on Chinese and Indian demand.

Of course Wall Street, i.e. instant gratification society, is not happy about one thing or another - in this case they are sniffing that BHP does not act like an American firm and use every last penny to either compensate their executive level employees or give every last time back to their shareholders.  Which would of course expose them (or any company) to potential cash crunches down the road if they listened to Wall Street's whining. This is no different than how Wall Street would prefer a technology company NOT to invest in Research & Development (which helps the company in the long run) if it means those extra investments would mean not "beating the estimate".  For Wall Street it's all about now - feed me... feed me.
  • BHP Billiton may have brushed off the recession, but investors are now grumbling at the mining giant's reluctance to indulge them with fatter dividends and a big share buyback.
  • Despite the recession, BHP reported underlying earnings down just 6% in the six months to June 30 thanks to buoyant copper prices and record iron ore and coal output. As a result, net debt is now equivalent to a little more than a third of annualized earnings before interest, taxesl depreciation and amortization, a fraction of its nearest rivals.  (only on Wall Street is that a bad thing ....)
  • The doesn't mean Mr. Kloppers is failing to put BHP's cash flow to work. The miner is planning investments of $22 billion in its existing operations by mid-2011, after having spent $15 billion in the past 18 months despite the recession.

I always enjoy interviews with management of BHP Billiton; despite being an oligarch in their sector (similar to the US financial firms) there seems to be a lot less hubris and a more grounded nature. (Actually it is a wonder any company can be run by a non America, since per the US dogma - those who are not paid at American exec wages are poor managers as compensation clearly is a sign of skill set)  Last summer we had a video with the CEO, today the CFO.  Becky Quick opens the interview with her predictable question about dividends, ripped straight from the Wall Street Journal, but then Richard Bernstein has to ask about it again later in the interview in such a lame manner:  "Can we take from that, that you don't have the confidence in your cash flow to support a rising dividend".  Thankfully Bernstein was smacked down, and put in his rightful place as nothing more than a pundit.

(5 minute video, email readers will need to come to the site to view)

Long BHP Billiton in fund; no personal position

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