Global mining giant BHP Billiton (NYSE: BHP ) reports earnings tomorrow, Feb. 20. With many of its mining peers having already reported, we have a sense of how things could play out. So far this earnings season, miners have been hit by huge writedowns and losses. Investors should watch to see if BHP Billiton is experiencing many of the same issues or if they've better insulated themselves from the effects of falling commodity costs and from paying too high a premium for acquisitions. Specifically, I'd watch to see how BHP answers the following three questions:
Will there be a writedown?
I bet you didn't know it, but writedowns are all the rage these days. Global, diversified mining peer Rio Tinto (NYSE: RIO ) unleashed a $14.4 billion writedown relating to botched acquisitions in aluminum and coal. That was more than enough to upstage metallurgical coal and iron ore producer, Cliffs Natural Resources (NYSE: CLF ) . For Cliffs, its writedown was centered around an iron ore acquisition and made $1.4 billion vanish.
Even gold and copper miner Barrick Gold (NYSE: ABX ) booked a $3.8 billion impairment charge relating to its copper business. CEO Jamie Sokalsky put the industry's woes into perspective when he said:
Rising costs, poor capital allocation and the pursuit of production growth at any cost in the industry have led to declining equity valuations across the sector. The message is clear: the industry must chart a new path forward. Barrick highlighted the need for change last year, and we are increasingly taking strong action and refocusing our business based on the principle that returns will drive production, production will not drive returns.
So, it wouldn't be a stretch to assume a large writedown is looming at BHP. It already took a near $3 billion charge in August relating to its oil and gas business. The company could take another writedown there focused on its Petrohawk acquisition as well as in its aluminum and nickel businesses which are also experiencing difficult market conditions.
Will there be a loss?
If there is a writedown, will it be on a big enough scale to generate a loss? Not only that, but how much did commodity price volatility affect the company over the past year? That one-two punch hit both Rio Tinto and Cliffs Natural Resources, but it really knocked the wind out of investors in Cliffs. That company had to slash it's dividend and dilute shareholders by raising equity. BHP has more global diversity, as well as an oil and gas business which should insulate it better than those peers. Still, a loss won't sit well for investors, especially one driven by poor capital allocation decisions that make shareholder capital disappear. Poor management isn't quite as easy to stomach as troubling macro conditions that affect the entire industry.
What's the game plan?
While Warren Buffett generates a lot of talk for his elephant hunting skills, BHP CEO Marius Kloppers is known to aim at really big targets as well. He fired and missed in attempts to acquire Rio Tinto and PotashCorp until settling on U.S. natural gas producer Petrohawk in a deal that was much smaller in comparison. Given the amount of vanishing capital within the industry, is Marius done hunting?
If so, how does he plan to grow the company going forward? We know that the company is scaling back its ambitious plans for Olympic Dam due to questions surrounding near- to mid-term demand. How will he differentiate BHP from its peers and not squander shareholder capital?
My Foolish take
I do think BHP Billiton is one of the better positioned global miners. I like the added diversification of its oil and gas business, and I'm a fan of Marius Kloppers. I think his attempts to grow the company by large acquisition are ambitious, though in hindsight it appears that being turned down by both Rio Tinto and PotashCorp were blessings in disguise. That being said, his visionary leadership is one that I can stand behind as an investor.
Whatever happens, BHP is unlikely to unleash anything close to the confidence-defeating news that Cliffs Natural Resources passed along to its investors. A lot would have to go wrong for a similar dividend cut and massive dilution. That begs the question: What did go wrong at Cliffs? The company has grown from a domestic iron ore producer into an international player in both the iron ore and metallurgical coal markets. It had performed well, relative to many competitors, in a very cyclical industry because of several factors that remained advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's brand-new premium report on the company.