The Rising Influence of Rising Affluence

[DewDiligence]

BHP Posts Record FY1H11 Results; Ups Share Buyback

[BHP is the world’s largest diversified mining company. Its fiscal year ends June 30, and it reports financial results for 6-month periods rather than quarters. That results for FY1H11 (ending 12/31/10) were superb is hardly surprising insofar as every major commodity BHP produces with the exception of oil & gas was at or near a record-high price during the period. FY1H11 revenue was $39.2B (+39% YoY), while FY1H11 EPS was $1.89 (+72% YoY). That EPS increased to a much larger degree than revenue is a consequence of BHP’s enormous operating leverage.

BHP does not issue financial guidance; however, annualizing the FY1H11 results (a reasonable first-order approximation) would give $3.78 of full-year EPS and a trailing P/E of about 20x based on the share price of BBL (the cheaper way to own shares of the dual-listed company). Thus, the valuation is somewhat steep compared to most mining companies, but BHP is sui generis; there is no safer way I know of to play the commodity angle of the Global Demographic Tailwind.

If commodity prices remain close to current levels, BHP may do even better than the $3.78 EPS run rate mentioned above because it plans to complete $10B of share buybacks during calendar 2011. Since BBL is trading at a discount to BHP, it would make sense for the company to buy shares of BBL, thereby narrowing the discount. (As I’ve previously noted on this board, there is no good reason for investors to buy BHP rather than BBL insofar as the two stocks have identical economic claims on the dual-listed company.)

BHP’s own PR on the FY1H11 results is at:
http://www.bhpbilliton.com/bbContentRepository/docs/110216BhpBillitonResultsForHalfYearEnded31December2010.pdf . FY1H11 production and revenue tables by individual commodity are at:
http://www.bhpbilliton.com/bbContentRepository/docs/110216SupplementaryInformationBhpBillitonResultsForTheHalfYearEnded31Dec2010.pdf . A transcript of the FY1H11 CC is at: http://www.bhpbilliton.com/bbContentRepository/docs/20110216InterimResultsPresentationTranscript.pdf . Webcast slides from the Fy1H11 CC are at CC Transcript: http://www.bhpbilliton.com/bbContentRepository/docs/110216InterimResultsFy11Presentation.pdf .]

http://online.wsj.com/article/SB10001424052748704343404576146782387714742.html

›FEBRUARY 16, 2011
By ROBB M. STEWART And DAVID FICKLING

Under pressure from shareholders to share more of its surging mineral wealth, mining giant BHP Billiton unveiled a US$10 billion share buyback and bigger spending and dividend plans, dampening speculation that Chief Executive Marius Kloppers will pursue another megadeal.

The world's fifth largest publicly traded company by market capitalization also reported a 72% jump in fiscal first-half profit to US$10.52 billion, underlining strong demand from China and other fast-growing regions as the global economy rebounds.

But BHP's share price declined in Australian trading, reflecting disappointment among some investors that the company hadn't used its massive annual cash flow to fund an even greater dividend and share buyback, said Lyndon Fagan, an analyst at Royal Bank of Scotland in Sydney.

The Anglo-Australian company—the world's biggest producer of the coking coal used in steelmaking and a top-three producer of copper, iron ore, nickel and silver—committed to spending $80 billion by 2015 on mines and oil fields. [That’s a serious cap-ex budget!]. BHP said it is "cautiously optimistic on the short term outlook for the global economy given the continuation of robust growth in emerging markets and further positive signs of a sustainable recovery in major developed economies such as the U.S."

Prices for its core commodities increased in its financial first half, driven by a combination of strong demand from emerging markets [duh] and supply constraints as mining companies held back on investment in recent years. BHP said it remains confident in the longer-term outlook for prices.

The past six months have been marked by BHP's failed attempts to complete a major deal to transform the giant company's long-term prospects. Its attempt to combine its iron ore operations in Australia's arid Pilbara region with those of fellow Anglo-Australian mining giant Rio Tinto, in a joint venture that would have accounted for about a third of global iron ore exports, was blocked by European regulators in October. A separate US$39 billion takeover bid for Potash Corp. of Canada, the world's biggest producer of the crop nutrient, was thrown out by Canadian politicians three weeks later.

At the same time, BHP and others have faced pressure to return more money to shareholders. Rio Tinto last week said it would buy back $5 billion in shares by the end of 2012, while Swiss mining company Xstrata PLC the same week tripled its dividend.

Mr. Kloppers said he wouldn't rule out any further attempts at a major takeover, but that gains in commodity prices had pushed the owners of assets to expect "ambitious" prices. He said the company's strategy of growth, returning money to shareholders and maintaining a "pristine" balance sheet was unchanged despite the failed attempts at mergers and acquisitions.

BHP said its net profit rose to $10.52 billion, or about $1.89 cents a share, for the six months through Dec. 31 from $6.14 billion, or $1.10 cents, a year earlier. Revenue advanced 39% to $34.17 billion from $24.58 billion.

Mining profits over the past year have surged as commodity-hungry emerging markets, particularly China, have bid up prices of key raw materials. Coking coal, thermal coal, aluminum, tin, silver, platinum and palladium are all close to multi-year highs, while iron ore, copper, and gold have hit all-time records in recent months.

Mr. Kloppers said BHP had a "clear opportunity" to invest in our its portfolio of assets and would spend about $16 billion a year over five years on oilfield development and large ore deposits such as potash in Canada, Escondida copper mine in Chile and Australia's Pilbara iron ore, Bowen Basin metallurgical coal and Olympic Dam copper-uranium mines. "Our strategy is to expand massive ore bodies over time," Mr. Kloppers said.

The investment is on top of plans to beef up BHP share buyback program to $10 billion by the end of 2011 and to increase its interim dividend to 46 cents a share from 42 cents previously. BHP in mid-November reactivated a $13 billion share buyback program begun in 2006 and suspended in 2007 with $4.2 billion in shares yet to be repurchased.

Investors regarded the bigger spending plans as an indication that BHP was no longer seeking a major, transformative acquisition. While some investors were frustrated with the push, others see major deals as a growth opportunity for BHP.‹