BHP outshines peers, gains financial strength
What makes BHP Billiton stand out among the world’s leading mining groups. To say that it is the biggest is begging the question. The answer is to be readily found in its balance sheet with a surprisingly low debt of $5.6 billion in spite of the large universe of its operation and a recession defying capital and exploration programme of $10.7 billion proposed for the current year.
As you compare this piece of deft housekeeping with Rio Tinto’s net debt of $23.2 billion you immediately understand that BHP’s retreat from acquiring the Anglo-Australian Rio had actually spared it of mountains of debt.
Besides a sector low gearing of 12.1 per cent, BHP, which announced 2008-09 results the other day, boasts of a healthy EBIT margin of 40.1 per cent and return on capital of 24.6 per cent.
Spared the pains in the form of inflated debts that Rio’s acquisition would have caused, BHP enjoys financial strength, unmatched in the industry, which it is to leverage for “opportunistic mergers and acquisitions” and target “tier-I assets” of exceptional quality, low cost and given to exploitation over long periods. No doubt, BHP has a balance sheet which is giving it a distinct competitive advantage over its peers in the mining industry.
Unlike the likes of Rio and Anglo American, BHP draws a lot of strength from its ownership of hydrocarbon assets. As it finds merits in expanding iron ore capacity at the existing mine sites, it also remains vigorous in its pursuit to expand exposure to oil and gas.
BHP has outshone industry peers by rewarding shareholders handsomely notwithstanding the turbulence commodities faced in the year to June 2009 and announcing a bigger capex programme for the current year. But times being difficult, the company will remain nimble in ensuring quick production response to any demand fall.
At the same time, expect this behemoth of a miner not to shy away from suspending or selling its cash negative operation. That there will be postponement or jettisoning of low priority capex programmes goes without saying. No sooner has the company announced the 2008-09 results, news comes of its hiring Bank of America-Merrill Lynch to auction the Ravensthorpe nickel operation in Australia for up to $1billion.
Developed at a cost of $2.1 billion and after being in operation for eight months, the mine was mothballed in January last. A month earlier, BHP also announced the sell decision for the Pabulum nickel refinery in Queensland. The bottom-line here is if any operation proves unprofitable, then chuck it and take a one-time hit.
Rio is off the BHP radar. But the prospect of saving $10 billion by combining the current and future iron ore mining operations in Australia’s Pilbara region is bringing BHP and Rio in an equal partnership JV. China, which heavily relies on ore supplies from Pilbara is worried about the development and it may well invoke anti-trust laws to scupper the deal.
However cost effective its operation may be, being a commodity player its turnover and profits will at all times be decided by market dynamics.
Fall in the commodity spot prices of up to 90 per cent in the first half of last year and prices at June-end being 20 to 60 per cent lower than at the year start dented BHP’s revenue and profits. As a result, a seven-year run of record results was broken. Nevertheless, the balance sheet remains strong.
What does this year hold for BHP and similar other groups? Arcelor Mittal chairman Lakshmi Mittal says 2010 should see at least a 10 per cent recovery in global steel demand. If that happens, then that will be marked by a major rally in spot prices of ore and coal in which BHP has a big exposure. But here we may have a case of triumph of hope over of reality.
BHP is unequivocal about economies of India and China doing well. At the same time, China’s commodity restocking now seems complete.
Will the newly emerging demand for commodities in the western world be enough to take care of any Chinese slack? BHP CEO Marius Kloppers says the world outside China and India have stabilised but at historically low levels of consumption.
Caparo chairman Lord Swraj Paul, a big user of steel, aluminium and copper, admits starting seeing “green shoots in the West. France, Germany and finally Japan bouncing back in the second quarter are no doubt a positive development for the Eurozone.
But steel users in the West and in Japan will start restocking once they are sure of receiving steady orders for finished products. Behaviour of steel prices still remains an open issue.” Doubts are there about growth sustainability.