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BHP Billiton counts the cost

The sheen of higher underlying profits was lost to an unexpected bump in costs
February 20, 2018

For resources companies, financial results leave little room to disguise capital expenditure overruns – especially if cloaked under the jargon of "a negative productivity movement". In the event, investors in BHP Billiton (BLT) saw through the euphemistically-worded $496m (£355m) cost increase, and marked down shares in the commodities giant on the publication of half-year numbers.

IC TIP: Sell at 1,518p

The chief culprits for the period’s unexpected outlay were a planned shutdown at the poly-metallic Olympic Dam mine, and geotechnical issues at the BMA petroleum and coal division. Undaunted, BHP is sticking to a $2bn cost savings target for the two years to June 2019, suggesting it believes this bumpy start can be reversed.

It is important that BHP exercises control where it can, because resource extraction already involves a fair degree of unpredictable and uncontrollable movements in costs and prices. Everything else being equal, $2.2bn of the first-half’s rise in underlying cash profits came from higher prices. At the same time, unit costs for copper, petroleum, iron ore and coal were all up on the FY2017 average, with costs for the Queensland coal division 8 per cent ahead of guidance.

The productivity drive also serves as a test of BHP’s ability to deliver and articulate its own strategy in the face of heightened investor scrutiny, courtesy of activist Elliott Management. Plans to exit the US onshore business – a key plank of Elliott’s agitation – are now advanced, and bids for the division will soon be considered ahead of a potential sale this time next year. While the business’s assets were free cash flow positive last year, we fear the persistent negative return on capital employed could dampen the chances of a windfall.

No compromise has been struck on Elliott’s final bone of contention: abandonment of BHP’s dual-listed company structure. Citing a third-party report, the activist reckons unification of BHP plc and BHP Ltd under one Australia-headquartered company could result in a $22bn gain for shareholders. The board’s response? “Currently, we consider that the costs and risks of collapsing the DLC outweigh the potential benefits.” Read into “currently” what you will. Ahead of any further clarity, shareholders are getting paid to wait, as a rigid interpretation of the distribution policy would have seen the half-year dividend fall slightly to 38¢ a share.

On average, analysts are asking for adjusted pre-tax profit of $14.8bn and EPS of $1.76 for the current financial year to June 2018, falling to $12.5bn and $1.38 in FY2019.

BHP BILLITON (BLT)   
ORD PRICE:1,518pMARKET VALUE:£89.1bn*
TOUCH:1,517-1,518p12-MONTH HIGH:1,662pLOW: 1,103p
DIVIDEND YIELD:4.6%PE RATIO:24
NET ASSET VALUE:1,070¢*NET DEBT:25%
Half-year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201618.85.4860.240
201721.86.0737.955
% change+16+11-37+38
Ex-div:08 Mar   
Payment:27 Mar   
£1 = $1.39.*Reflects both UK and Australia-listed shares