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BHP Billiton - Profits and dividends sharply down

Steve Clayton | 23 February 2016 | A A A
BHP Billiton - Profits and dividends sharply down

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BHP Billiton, the world's largest mining company has reported a 54% decline in underlying EBITDA for the half year to Dec 31 2015 and an 84% decline in operating profits (EBIT) to $1.3bn. Underlying earnings per share fell by 92% to 7.7 US cents and the dividend is cut by 74% to 16 US cents. After impairment charges, the group reported a statutory loss of $5.7bn.

BHP Billiton now expect commodity prices to remain lower for longer, with greater levels of volatility. In future the company will pay out a minimum of 50% of Underlying attributable profit at each reporting period, and in each instance, the Board will assess whether cash flows were sufficient to justify paying additional amounts. In this period, cash flows allowed an additional 12 cents on top of the 4 cents suggested by attributable profit.

The group announced further reductions to capital expenditure of $3.5bn over the next two years. Operating costs have been pushed significantly lower; drilling costs per well in the US shale oil division are 32% down on a year ago, iron ore costs are 20% lower per tonne and coal costs have fallen by 9% per tonne. An expected lower grade of ore at Escondida copper mine means unit costs there are 20% higher, but down 14% on a grade-adjusted basis. Excluding the impact of lower Escondida grades, the group expect to deliver productivity gains of $2.1bn in the current year.

In November the group's Samaraco JV suffered a tailings dam failure at its operations in Brazil, which has led to the deaths of at least 17 people. The company is working with the government and community to investigate the causes, restore the damage caused and compensate the communities affected. The Group took an US$858m charge in the period but is subject to substantial legal proceedings related to the matter.

The group was free cash flow positive, by $1.2bn, despite lower commodity prices, which impacted EBITDA by US$7.8bn. Net debt rose by $1.5bn to US$25.9bn leaving gearing at 29.7% (2014: 22.4%).

CEO Andrew Mackenzie said that "with improved financial flexibility and a portfolio of high-return growth options, we are well positioned to grow shareholder value and cash returns over the long term".

Our view

The dividend at BHP Billiton had looked in doubt for some time and today's announcement just confirms what the market already knew: a policy of paying continuously rising dividends only works for a commodity producer when the merry-go-round is spinning nicely. The new policy is more realistic.

Crucially though, the new dividend policy gives a strong hint that BHP is not on the hunt for acquisitions, otherwise it would be expected to keep more of its powder dry. Brazil has talked of pursuing Samarco for billions in restitution for the dam spill, so there is another large claim on the company's cash flows, on top of shareholders, taxation and the needs of the business itself.

Operational cost control impresses, with around $12bn having been cut out of operating costs over the last few, turbulent years. BHP's core iron ore assets are now running at just $15 per tonne of costs, leaving them robustly profitable even at today's low prices. Just as well, given continuing output increases from Western Australian mines.

The new dividend policy is likely to lead to a less predictable payout. Low production costs in the iron ore business should keep underlying cash flow positive, so there may be scope to top up the base payout, as we saw at this interim stage. But earnings themselves are likely to be under pressure for some time and we would not expect a return to historic rates of dividend payments for the foreseeable future.

The prospects for the stock will be highly dependent on the future path of commodity prices, which, as BHP Billiton themselves have pointed out, are likely to be lower for longer. At least the company itself appears to be doing everything humanly possible to maximise earnings in this tough environment.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.