In a sign of faltering Chinese industrial demand,
In common with industry peers, BHP has had to contend with a sharp contraction in commodity prices that has been compounded by rising cash costs. Falling prices within the group's base metals and iron ore segments hit comparable underlying profitability to the tune of $2.9bn. Another $1.2bn was attributable to the combined shortfall from the aluminium, manganese and stainless steel businesses, while rising costs reduced profits by another $2.7bn. Profitability was also hampered by lower natural gas prices in the US and industrial action at its coking coal mines. The group said it would recognise a $346m pre-tax impairment of the Olympic Dam project, to add to the previously foreshadowed $2.8bn write-down on its US shale business and the $450m hit on its Australian nickel division.
The Olympic Dam project would have resulted in open-cast operations capable of producing 750,000 tonnes of copper and 19,000 tonnes of uranium a year, but falling realised prices have forced a strategic re-think. The group doesn't expect to make any more major project approvals in the current financial year, but is going ahead with $22bn in capital spending already approved. BHP's decision to delay the expansion is just one of a number of big-ticket developments that have been put on ice by global miners. One likely consequence is that cost pressures on existing projects should ease as demand lessens for specialist labour and materials.
Investors might not be too disappointed with the Olympic Dam call, given that it will free up capital potentially to their benefit. Brokers expect EPS to be flat at around 281¢ for the current financial year so, at 1,951p, BHP Billiton's shares are rated on 11 times forecast earnings and yield around 3.6 per cent. That's hardly exorbitant, but they rate a hold for now.
Last IC view: Hold, 2,185p, 8 Feb 2012