BHP primed for South32 spin-off

The group has nonetheless had to contend with steep price falls across all the key commodities it supplies. These reduced interim cash profits by 12 per to $14.5bn during the half. The group's energy division, which had been generating around a fifth of group revenues, was a particular cause for concern because of the plummeting crude oil price. But BHP has moved quickly, putting in place plans to reduce its onshore US rig count by 40 per cent. Management has also taken the axe to the group's key iron-ore operations in Western Australia, reducing unit costs to $20 a tonne. That led to an underlying margin of 49 per cent, which leaves plenty of headroom to accommodate further price falls.

The City's attention is now centred on the group's plans to demerge a separate commodities entity called South32, which analysts estimate will be worth around $15bn. If BHP's shareholders approve the corporate action, it could lead to a higher pay-out ratio, as there are no plans to rebase the existing dividend. Ironically, the commodity businesses that BHP plans to spin off from its mining complex were strong performers in the half year. Improved prices and reduced unit costs bumped up cash profits from the group's nickel, aluminium and manganese businesses, which will form the backbone of South32.

Success in reducing capital and operating expenses enabled the group to increase free cash flow by $709m during the period to $4.1bn, bringing down net debt. The estimated outlay for the 2015 year is now 15 per cent below original guidance. JPMorgan Cazenove anticipates adjusted EPS of $1.40 for the year to June, falling to $0.98 in 2015-16.