Why BHP Billiton's profit slump is not bad news

Profits slumped by almost half at BHP Billiton in the six months to December as commodity prices fell further. However, costs are being cut with greater enthusiasm than the City had demanded, and the mining heavyweight made more money than expected in the first half, too. A 5% increase in the interim dividend and news that the demerger of its aluminium, coal, manganese, nickel and silver assets is on track rounded off a very well-received set of numbers.

Underlying cash profit fell 12% to $14.5 billion during the half-year, but was still 8% ahead of consensus estimates. Given that a 12% drop in revenue to $29.9 billion was more or less in line with forecasts, the implication is that costs are falling faster than anticipated.

Indeed, a productivity drive cut operating cash costs by $1.8 billion and delivered productivity gains of $2.4 billion. That should exceed $4 billion in 2017. Unit cash costs fell by 29% at Western Australia Ore, 15% at Queensland Coal, 13% at Escondida in Chile and 8% at Onshore US.

Capital expenditure will be about $1 billion less than expected, too. It fell by 23% during the half to $6.4 billion and will likely be no more than $12.6 billion this year, says BHP. It'll be just $10.8 billion in 2016.

Given the earnings beat - a 31% drop in underlying basic EPS to 100.7 cents smashed the 91.1 cents expected - consensus estimates are fully expected to increase. Previously, the City had pencilled in 155.9 cents for the 12 months.

Says Investec Securities:

A very good result from the company, with the $4.1 billion of free cash flow (after capex) illustrating the cash generating capacity of the company and the increased dividend reflecting its confidence in being able to maintain this, notwithstanding the extreme commodity price volatility. In this regard we note that the Brent price ended the period down 47% from the price it started with, while iron ore ended 28% down and copper 12% down, indicating that it will be challenging (a miracle) for BLT to replicate its 1H earnings in the 2H.

BHP shareholders will receive shares in new spin-off South32 this year, too. The demerger of BHP's unwanted assets into a $10 billion revenue business is expected to complete in the first half of the calendar year. Full details will be released mid-March ahead of a shareholder vote early May.

Up 4% at 1,605p, BHP shares offer a prospective dividend yield of over 5% - the half-year payout is increased by 5% to 62 cents per share - which looks to be safe. A confirmed break above technical resistance - about where the share price is now - would be significant.

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