Global mining giant BHP Billiton (BHP 0.69%) reported its half-year results for the period ending on Dec 31. It has been a very challenging operating environment for the mining industry with the growth rate in China slowing and the global economy as a whole rather stagnant, which slowed commodity demand. Making matters worse, strong currencies where BHP produces further weakened its results. This was a recipe for lower commodity prices and led to a 14% decline in revenue at the global mining giant.
The combined pressures on margins caused underlying EBITDA to come in at $13.2 billion which was down 29% while net operating cash flow clocked in at $6.4 billion or down 48%. As bad as that sounds, it wasn't as bad as the losses reported by Rio Tinto (RIO +2.44%) or Cliffs Natural Resources (CLF +0.00%). Let's dig a little deeper and see what kept BHP from the same fate as those peers.
With both Cliffs and Rio reporting ahead of time we got a pretty decent preview of what we could expect from BHP. We saw the results of both miners being greatly affected by massive impairment charges relating to botched acquisitions. For Rio Tinto its acquisition of Alcan a few years ago really blew a hole in its results as the company booked more than $14 billion in impairment charges while Cliffs booked a smaller charge for it's own soured deal. Adding insult to injury, both companies saw underlying earnings compress under the weight of lower commodity prices. Since BHP didn't have any major impairment charges to report, a bulk of its earnings shortfall can be blamed on those weak commodity prices.
In fact, commodity prices reduced underlying EBIT by nearly a third for the quarter. Iron ore and metallurgical coal prices were the biggest culprits here. According to CFO Graham Kerr: "The level of price volatility was most acute in the iron ore market as a significant destocking cycle temporarily disrupted the supply/demand balance. Weak demand and a recovery in low-cost supply also led to a significant decline in metallurgical coal prices." While this clearly affected BHP's bottom line, its diversification across commodities helped insulate the company from the same fate as Cliffs which saw its shares plunge by 20%.
BHP's diversification and position in the world marketplace has enabled it to make prudent capital moves when others simply can't. Over the past year BHP has announced $4.3 billion in asset divestments to further strengthen its capital structure. These sales were done at a premium to the market's ascribed value while having a minimal impact on earnings. These prudent portfolio trimmings have helped BHP avoid dilutive offerings similar to Cliffs while boosting, instead of cutting, its dividend.
Despite its missteps along the way, BHP continues to deliver value to investors. Since 2008 BHP has delivered 47% total shareholder returns while its peers have as a whole destroyed value over that same time frame. Over the past decade the company has returned nearly $57 billion to shareholders in the form of dividends and buybacks. Needless to say, the company has done a good job of managing for the benefit of its investors.
The management team, which will soon be under new leadership, also has been known to focus on controlling costs. Those controllable costs have been reduced by $1.9 billion on an annualized basis as the company tightens its belt where it can. Without this focus, results would have been worse. Instead, the company is positioned to thrive in the years ahead.
What BHP can't control in the near term are commodity prices which will always have the greatest impact to its profitability. The bottom line here is that BHP is doing what it can to prudently manage its business to deliver the highest possible results to investors over the long term. As a shareholder, I can't complain with this course of action and I think BHP is doing a very solid job given the current operating environment.
