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BHP Billiton on the ropes

Anglo-Australian mining giant BHP Billiton has turned in its worst earnings performance in a decade
August 25, 2015

With the mining giant's chief customer, China, lurching into economic turmoil, we shouldn't be too surprised that full-year figures from BHP Billiton (BLT) fell short of City forecasts. But the 52 per cent reduction in the group's underlying earnings is eloquent testament to the commodity rout in its main markets.

IC TIP: Hold at 993p

The bottom line wasn't helped by previously announced impairments against the group's US shale division and the Nickel West business. And the group was also forced to book an $829m (£528m) charge on its copper division, including stockpiles at Escondida and a provision for redundancies at Olympic Dam in South Australia.

Realised prices for the group's crude oil output were down by a third, while average iron ore and copper receipts were down 41 per cent and 14 per cent, respectively. To counter ongoing price weakness, the Anglo-Australian miner reduced its annual capital and exploration outlay by a quarter to $11bn in the period under review. Management expects to cut the bill by another $4bn over the next couple of years as the group moves to protect its dividend. The good news on that front is that, despite multiyear lows in commodity prices, the group reduced net debt by $1.4bn, generating $6.3bn in free cash flow, as it continued to drive operating and capital efficiencies.

The pressures on cash flows are unlikely to let up, particularly given the deteriorating outlook for China's steelmaking industry. But the pre-emptive actions taken by chief executive Andrew Mackenzie and his team have placed the group firmly on a defensive footing with the dividend, which looks almost sacrosanct. And although the group reduced its estimate for peak Chinese steel demand, Mr Mackenzie makes the point that with its peak capital commitments behind it the group will be able to step up production volumes "at very low cost" in response to any cyclical recovery in its key markets.

JPMorgan Cazenove expects adjusted EPS of 74¢ for the year to June 2016, against 121¢ in FY2015.

BHP BILLITON (BLT)
ORD PRICE:993pMARKET VALUE:£55.2bn
TOUCH:992-993p12M HIGH / LOW:1,829p956p
DIVIDEND YIELD:8.0%PE RATIO:43
NET ASSET VALUE:1,215¢*NET DEBT:35%

Year to 30 JunTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201167.9031.30429101
201267.0023.90291112
201363.1019.70211116
2014 (restated)56.7621.74260121
201544.648.0635.9124
% change-21-63-86+2

Ex-div: 10 Sep

Payment: 29 Sep

£1=$1.57. *Reflects both UK and Australia-listed shares