Bhp Billiton Ordinary US$0.50 (BLT)

Company overview

The Group's principal activities are exploring for, developing, producing and processing minerals, oil and gas. The Group's operations are divided into nine business divisions. Base Metals focuses on copper, silver, zinc, lead, uranium and copper by-products including gold. Petroleum focuses on hydrocarbons covering oil, gas and liquefied natural gas. Aluminium relates to bauxite, processing and marketing of aluminium and alumina. Iron Ore focuses its mining activities in the areas of Western Australia and Brazil. Energy Coal focuses on energy coal for use in electricity generation. Metallurgical Coal operates three underground coal mines in Australia. Manganese focuses on alloys, ores and metals. Stainless Steel focuses on nickel minerals which are used in the production of stainless steel. Diamond and Specialty Products operates a diamond mine in Canada and an integrated titanium smelter/mineral sand mines in South Africa. The group employs around 41,000 people working in over 100 operations in 25 countries.

HL Comment (8 February 2012)

The group's half year results proved something of a mixed bag. On a headline basis, profitability declined by 7.1% to US $9.94 billion, impacted by labour disputes and some weaker commodity prices. However, overall revenues increased by 9.7% to $37.48 billion, while earnings on an adjusted basis climbed by 5.8% to $15.68 billion. Robust operating cash flow of $12.3 billion was highlighted, while the interim dividend saw a 20% hike to 55 US cents per share. Underlying return on capital remained at the robust level of 28% according to management, while record Western Australia Iron Ore production and stronger bulk commodity and petroleum product prices were the major catalysts for the rise in underlying adjusted earnings.

Negative Points:

• Prices for many of BHP Billiton's products declined during the latter part of the 2011 calendar year as concerns surrounding broader European liquidity culminated in a general deterioration in commodities demand.
• A series of operational challenges constrained margins across the broader product portfolio, with a temporary reduction in production at leading businesses such as Escondida (Chile) and Queensland Coal (Australia) further exacerbating underlying cost pressures.
• Accompanying management comments highlighted continued difficulties in Europe and slowing levels of activity in the high growth economies of China and India. Management's base case for the outlook was for a protracted recovery for the developed world, with the disorderly unwinding of European government debt remaining one of the key downside risks.
• Cost pressures for both BHP and the wider industry continue to be seen. Higher fuel and energy prices (of which BHP Billiton is a net beneficiary), together with increased maintenance, labour and contractor expenses continue to provide cost pressures. Excluding the impacts of inflation, exchange rate volatility and non-cash items, costs reduced underlying earnings $1.6 billion.
• The cost related impact of the stronger Australian dollar that persisted for much of the half year reduced underlying earnings by US$632 million.
• Net debt, comprising interest bearing liabilities less cash, was US $21.5 billion which is an increase of $15.6 billion compared to the net debt position at 30 June 2011.
• A serious of attempts substantially to expand the company have failed, including a proposed merger with giant rival Rio Tinto. As such, the opportunity to remove significant costs has been lost. Costs in relation to each failed deal, including potential fees to investment bank advisers, have been suffered.
• The group remains dependent on global economic growth, particularly for major customer China.

Positive Points:

• Record production was achieved for iron ore and natural gas in the December 2011 half year.
• The group highlighted two bright spots over the half year. The US saw stronger growth on the back of robust performance in the manufacturing sector. Japan saw a rebound in activity following the impacts of the March 2011 earthquake and tsunami.
• The general strengthening of the US dollar against a basket of currencies at the end of the period led to a US$1.0 billion increase in adjusted earnings. In total, exchange rate volatility increased underlying earnings by $543 million in the half year period.
• The company's US$532 million investment in minerals exploration in the period continued to yield significant results. Potash exploration in Canada and drilling programs in the Pilbara and Bowen Basin (both Australia) have further increased management’s level of confidence in the mineral, underpinning its extensive growth pipeline.
• BHP already enjoys extensive product diversification. Earnings from the group's petroleum business, a business not enjoyed by major rivals, rose by over 38%. Petroleum for the half year generated just under 18% of group revenues.
• The company approved five major projects during the half year for a total investment commitment of US$4.0 billion.
• Management outlook comments note that "In the longer term, we remain positive on the outlook for the global economy as the drivers of urbanisation and industrialisation in China, India and other emerging economies are expected to underpin global growth and robust commodities demand."
• The company is a potential beneficiary of any broad recovery on the global economy.
• The Glencore Xstrata merger has reminded investors of further possible consolidation within the sector.
• Recent Central Bank measures – QE, or the printing of money – are arguably good for non-man made assets such as hard commodities. While quantities of a base metal mined cannot be increased suddenly, quantities of a currency in which the commodity might be priced can.

Consensus

On balance, market consensus indicates a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: US dollar.

Year Ending	Revenue (m)	Profit Before Tax (m)	EPS ($)	P/E Ratio	PEG	EPS Growth (%)	Total Dividend	Dividend Yield
30-06-2011	71,739.00	31,255.00	4.29	9.90	0.10	76.00	1.01	2.60
30-06-2010	52,798.00	19,572.00	2.29	12.40	0.80	16.00	0.87	3.10
30-06-2009	50,211.00	11,617.00	1.06	11.20	n/a	(30.00)	0.82	3.80
30-06-2008	59,473.00	23,483.00	2.75	11.10	0.60	18.00	0.70	2.30
30-06-2007	47,473.00	19,212.00	2.30	9.40	0.30	35.00	0.47	2.10