BHP Billiton leagues ahead despite profit dip
BHP Billiton (BLT) posted a drop in its attributable profits for the first time in two years, which it said reflected "continued difficulties in Europe and slowing levels of activity in the high-growth economies of China and India".
However, the company highlighted two "bright spots" - the United States, which saw stronger growth on the back of robust performance in the manufacturing sector, and Japan, which saw a rebound in activity following the impact of the March 2011 tsunami.
Net profit declined by 5.5% to $9.94 billion (£6.25 billion) in the six months through December. This is a far cry from the record $23.65 billion profit the company brought in for the whole of last year, driven by soaring prices for iron ore and other key commodities.
Revenues for the six months increased 9.7% to $37.48 billion. In contrast, Xstrata's (XTA) revenue rose 11% to $33.9 billion for the full year to December 31.
BHP's current market value eclipses the combined $90 billion Glencore-Xstrata mining giant. However, there are worries that the proposed new entity Glenstrata may use its advanced scale to chase further acquisitions and to possibly gain a foothold in commodities such as iron ore.
Operationally, BHP Billiton approved five projects during first half for a total investment commitment of $4 billion. The company's growth projects in execution now exceed $27 billion, of which $17 billion was yet to be invested as at 31 December 2011.
Among other investments, billions are going into Australian iron ore and coking coal, and BHP is considering growing its Olympic Dam copper, gold and uranium mine in Australia as well as developing its potash assets in Canada. Finally, it has said that it would invest some $20 billion in its US shale business, which it picked up in two large acquisitions in 2011, together worth $17 billion.
Looking ahead, underlying demand growth rates are expected to remain robust, "so long as the macroeconomic policy setting of the developing world retains a growth bias". However, the company warned that volatility in commodity markets would persist "as the European sovereign debt crisis and general weakness in the manufacturing and construction sectors across key markets are expected to weigh on customer behaviour and sentiment".
By commodity, copper and iron ore are expected to remain supported by the "compelling supply-demand fundamentals", while the structural shift in Chinese demand for metallurgical coal "remains well entrenched". Iron ore remains BHP's main earnings driver, as it does with other mining companies including Rio Tinto (RIO).
In contrast, the outlook for the aluminium, nickel and manganese alloy industries remained "challenging", leading to significant margin compression for most producers.
The outlook for the mining sector is dominated by Chinese and emerging market demand, says Catherine Raw of BlackRock's World Mining Fund. For more, watch: Mining outlook dominated by Chinese demand.
