Mining giants emerge from crisis all cashed up
Source : The Wall Street Journal
Published on : 19th February 2011
When the global financial crisis froze the growth capabilities of BHP Billiton's debt-heavy rivals, there was a mantra that started to come out of the big miner. And it was still there when it released a record $US10.7 billion ($10.5bn) first-half profit last week.
This was that the company would provide superior returns by being able to invest through the cycle.
Looking at this reporting season's mammoth efforts from BHP and its local rival Rio Tinto -- whose growth was crippled by its debt during the GFC -- there is evidence of plenty of windfall gains for both, but little of BHP's strong balance sheet during the crisis flowing through to the bottom line.
According to BHP chief Marius Kloppers, that will come soon. In the last half of last year the two miners made a combined record underlying net profit of $US18.9bn, enabling them to commit to buying back an extra $US10.8bn of their shares.
They also expect to spend a hard-to-fathom $US135bn on new projects, mostly in Australia, over the next five years.
To put that in perspective, it is 1 1/2 times the market value of the Commonwealth Bank, the biggest Australian-listed company after the miners.
Illustrating the similar second halves the two companies had, BHP's share of the combined profit and capital expenditure was about 60 per cent, which was in line with its $260bn market value, compared with Rio's $170bn.
The combined profit, which was double that of a year earlier, was almost entirely due to surging iron ore prices, along with those of copper, coal and oil, rather than increased production.
The past six months is an unfair snapshot with which to compare the performance of the two companies since the start of the GFC (total returns to BHP shareholders have been far greater), but it does indicate that BHP's capital investment -- while Rio, Xstrata, Vale and AngloAmerican were hamstrung -- has not yet made an impact. Mr Kloppers sees this as a just a matter of time. "Over the the next year or two . . . you clearly have an impact on supplies coming on as a result of basically an industry withdrawal of capital during the financial crisis," he said after the company's results were released on Wednesday. "And I want to emphasise . . . that we did not stop our investments during that; we kept on investing throughout the cycle."
BHP's major project coming on line in the next two years is its $US4.8bn Rapid Growth Program 5 iron ore project, which is expected to increase West Australian iron ore capacity by 50 million tonnes by the end of 2012.
Rio expects to lift by the same amount a year later.
That said, BHP's execution of RGP 5 has cost it some ground, while Rio foundered in the GFC, the project was supposed to hit full capacity by the end of this year.
While no one is expecting the windfall profit gains of this reporting season to repeat themselves, analysts' forecasts indicate BHP's profit will grow more than Rio's in the next couple of years.
BHP's problems will now turn to finding uses for its huge free cashflow, with a definite path to spending $US80bn over five years yet to be spelled out. And if commodities prices remain strong, it will have a lot more cash than is needed for this.
Morgan Stanley analyst Craig Campbell said that even after the spend, he figures BHP will have net cash of $US50bn by 2016.
If commodities prices don't hold up for as long as Morgan Stanley expects, it is still a very good bet BHP, and possibly Rio, will be returning more to shareholders in six months on the back of record iron ore prices.
UBS holds a different slightly different view. "BHP is reinvesting more into the business and to shareholders, than what it is currently generating," UBS analyst Glyn Lawcock said. "We expect to see BHP move back to a net debt position over the next 12 months and the ongoing focus on organic growth, combined with current high equity valuations, likely to dampen merger and acquisition concerns." While the results were close to market expectations, the huge numbers astounded those who were not keeping a close eye on the mining giants.
And the windfalls had more people thinking that Kevin Rudd's rushed and fumbling blindside of the miners in the form of the resource super profits tax might have seen the pendulum swing too far the other way through the rushed pre-election compromise BHP, Rio and Xstrata negotiated with Julia Gillard.
But it is not as simple as taxpayers missing out on $60bn of revenue under the Gillard compromise, because less profitable projects than iron ore, such as the up to $20bn Olympic Dam mine expansion in South Australia would have had more trouble getting up. This would have not only shrunk tax revenues, but the size of BHP's reinvestment in the country.
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