BHP First-Half Profit Gains 31% on Iron Ore, Lower Costs

BHP Billiton Ltd., the world’s biggest mining company, said first-half profit rose a more-than-expected 31 percent as its iron ore earnings gained and costs declined amid improving global economic growth.

Underlying profit rose to $7.8 billion in the six months to Dec. 31, from $5.9 billion a year ago, the Melbourne-based company said today in a statement. That beat a median forecast of $6.9 billion of seven analysts surveyed by Bloomberg. The stock rose to a one-year high in Sydney.

BHP, which increased its dividend 3.5 percent and forecast more cost savings, expects the global economy to strengthen in fiscal 2014, aided by positive sentiment in the U.S. and Japan. The company joins smaller rival Rio Tinto Group in reporting a rise in profit after clamping down on spending to focus on its most profitable operations including iron ore and copper.

“They’ve delivered the earnings number, they’ve cut their capital expenditure and they are now getting very attractive returns on capital” of 22 percent, said Peter Esho, chief market analyst at Invast Financial Services Pty. in Sydney. “That’s what adds shareholder value, and that’s what the large, influential fund managers wanted to see.”

BHP rose 2.3 percent to $38.89, the highest since Feb. 19 last year. The benchmark S&P/ASX 200 Index gained 0.2 percent. Net debt is expected to drop toward $25 billion by the end of fiscal 2014, enabling a possible share buyback, according to a UBS AG note today.

“Global economic conditions improved during the December 2013 half year,” the company said according to the statement. “The balance of risk to global growth is skewed to the upside, particularly given the broad based alignment of macroeconomic indicators in the major developed economies.”

Spending Down

The world’s mining companies are reining in spending after a decade-long boom in metal prices waned after producers boosted supply and China’s economy expanded more slowly. BHP is focusing on the highest-returning projects, and plans to spend $16 billion during fiscal 2014 on new projects and exploration, down from $22 billion on the previous year.

Rio, the world’s second-largest mining company, bolstered its dividend after last week reporting a 43 percent gain in second-half profit. The outlook for China’s economy and for short-term commodity demand remains positive, CEO Sam Walsh said on an earnings call.

Biggest Buyer

Iron ore is the biggest contributor to BHP’s results, followed by petroleum. The price of the steelmaking raw material climbed 15 percent in the second half of last year as China, the world’s biggest buyer, boosted stockpiles to the highest in more than a year.

Supply of iron ore, BHP’s most profitable unit, will exceed demand growth after producers including BHP added new supply in Australia and Brazil, the company said. Its iron ore unit earnings gained $1.7 billion to $6.5 billion.

“We still see some issues arising from new supply coming on,” CEO Andrew Mackenzie said today on a call with reporters. “As we look further forward by a quarter or two, our conclusion is that there is more supply coming into the iron ore market than there is demand growth in places like China and elsewhere.”

The price has dropped 7.3 percent this year. It’s forecast to decline every year until at least 2017, according to data compiled by Bloomberg, as banks from Goldman Sachs Group Inc. to UBS expect supply expansions led by Australian producers to push the seaborne market into surplus in 2014.

“Increasing iron ore supply globally will weigh on the long-run iron ore price,” UBS analysts led by Glyn Lawcock said in a note before the earnings. “However, BHP is one of the lowest cost producers and in our view will continue to be a very competitive player in the iron ore space.”

Slowest Pace

Analysts expect China, the mining industry’s biggest customer, to grow at the slowest pace in 24 years in 2014. The ruling Communist Party is trying to balance reining in a credit boom while maintaining expansion above Premier Li Keqiang’s 7 percent “bottom line” to sustain employment.

“A lot of the credit stress is actually being quite well used by the Chinese government to drive rationalization within their industries, and also to drive environmental performance,” Mackenzie told reporters. “Some of that actually will result in a loss of domestic supply of things like iron ore.”

Cost Savings

Annualized cost cutting and efficiency gains total $4.9 billion, and are expected to rise to $5.5 billion by the end of fiscal 2014, BHP said. The boost in productivity has led to a 9 percent increase in the margin of underlying earnings before interest and tax to 38 percent.

The copper unit’s underlying earnings before interest and tax of $2.9 billion beat consensus estimates by 25 percent, according to UBS. Its coal unit earnings rose to $510 million from $79 million, while petroleum fell 16 percent to $2.5 billion.

“The iron ore profit is fantastic, that’s what everyone is going to talk about,” Evan Lucas, a Melbourne-based markets strategist at IG Ltd., said by phone. “The question will be whether or not they are worried about the sales, or worried about the fact that petroleum is a little bit softer than expected.”

Before it's here, it's on the Bloomberg Terminal.