BHP Billiton half year numbers

BHP Billiton amongst many other companies released results this morning, long before most of us were at work. Reason being of course is that they like to give the Australian shareholders the ability to be able to see these results and act accordingly, if that is ever something, "act accordingly". These are results for the half year to end December, the company has been hurt hard by falling prices, some of their key commodities Iron Ore and Petroleum have seen precipitous falls in their respective prices. CEO Andrew MacKenzie put on a brave face when delivering results that are ahead of market consensus, the biggest surprise to the market (although we have intimated that this might be the case) is that the dividend has been hiked. In a falling commodity market the company has managed to deliver strong cash flows and pay down debt. The interim dividend has been hiked by five percent to 63 cents, at the current Rand/Dollar exchange rate of 11.64 that translates to 733 ZA cents before tax. I guess that may (probably not) change with the budget speech tomorrow. Probably not.

Underlying attributable profit was down 31 percent to 5.4 billion Dollars. There is a pretty interesting graph in the associated presentation, slide 8, which shows the factors that they control. Exchange rates and price received had a material impact, as much as 5.9 billion Rand for the half. That makes a big difference. However, the costs that the company could and did control over the half amounted to savings of 2.7 billion Dollars. I know it is the easiest thing to do, to sit here in my comfortable little corner and critique businesses (far easier when you have cool air-conditioning blowing on you), I always wonder why when things get tough that businesses cut costs aggressively. Surely costs should be controlled all of the time?

In fairness to BHP Billiton, they did not push the envelope and have always been conservative with their cash. Such is the aggressive nature at which they have cut costs at their iron ore business, those have decreased 29 percent to be at a mere 20.35 Dollars a tonne now. Just a reminder, the iron ore price is around 61 Dollars a ton. Expectations from various financial houses see a price between 75 to 87 Dollars a ton a little later in the year. It is impressive at how quickly the company managed to reduce costs, comfortably ahead of their internal targets. Not just in their iron ore business, across the board in all businesses.

On to the other major area that has been feeling the heat, the Petroleum division. The company says in the long term forecast that Higher prices will be required to induce the new supply needed to offset natural field decline and meet growing demand. I guess that is true. Once you have burned gas to heat your house, cook your food and driven your motor vehicle to and from work, or to school or wherever it is that you travel, that product has been used. It is gone. Unlike many of the other bulk commodities, you cannot recycle petroleum products. Their cash costs however, and this should be noted, for onshore US (shale) is just a little over 16 Dollars per barrel equivalent. It is still low, and must mean with better technology and savings that it could go lower. That is a risk to many of the businesses out there that produce at this size and scale.

Last up, the proposed demerger of the South32 assets will be clearer when a) we see the documentation associated with it in less than three weeks and b) shareholders more importantly put this to a vote in early May this year, a little over two months from now. The days will be shorter and it will be getting colder no doubt. The BHP Billiton business ex the South32 assets will be of much higher quality, and a lot more focussed which is both good and bad. Bad when your key commodities have taken a hit, ironically the South32 commodity prices have not been under as much pressure. We continue to evaluate the company on a client by client basis, acting accordingly. The stock is up over three percent, reacting positively to the results.