BHP Billiton says it is still better placed than any other major miner to withstand the global financial and commodities markets turmoil.
It still thinks the Rio Tinto bid was a good idea, and no doubt still hankers for the deal at some future date.
It also sees Chinese steel making falling 17% year-on-year, thanks to the financial crisis and other factors hitting China’s economy.
It is still is a believer in the long held idea that the emerging economies, particularly China, will drive natural resources demand growth in future years.
But clearly there will be a bit of delay.
There’s a new realism in the room: the slowing global economy and especially the credit crunch are proving that no even the world’s biggest mining company can go against the trend.
The decision to stop the Rio Tinto bid was evidence of that.
Yesterday’s AGM for Australian shareholders was in Melbourne. It was against a very different background to the meeting in London a month ago for the Plc shareholders.
Then Rio was still on and BHP was still a believer
Now the flailing credit and capital markets and fears about debt have made Rio too problematic for even the biggest mining company in the world.
Chairman Don Argus told the meeting that pulling out of the takeover bid for Rio Tinto this week had been "a tough decision" for the management team.
He said while it was disappointing the financial risk had increased in the time since the initial proposal in November a year ago.
Then the combined market capitalisation of the two companies would have been around $US298 billion and net debt about $US87 billion.
"This resulted in a market gearing ratio of the combined company of around 23 per cent. The cash flow could have repaid this debt in a few years," Mr Argus told shareholders.
By last Friday, after accounting for a proposed $US30 billion buyback, the combined market capitalisation would have been about $US84 billion and the debt would have been around $US78 billion.
That would have left the merged company heavily geared; the debt position would have exposed it and reduced its capacity to do deals.
The debt created "unacceptable financial risks for BHP Billiton shareholders" (you can imagine hedge funds licking their lips).
Mr Argus was confident about the long term yesterday, saying the company remained of the view that long term demand for metals, driven by the longer term growth fundamentals of emerging economies will be robust.
"In the long term, driven by the continued urbanised and industrialisation of China over time," Mr Argus told shareholders.
He said BHP Billiton as a stand alone company was in a very strong financial and operating position.
"We believe we are in a better position than any other major mining company to deal with these uncertain times."
Chief executive Marius Kloppers told the meeting there was no doubt it was a challenging time.
"If you look at Chinese steel production, the subject of much public discussion recently, we see a decrease of 17 per cent year-on-year and this will eventually flow through to all of us in the industry."
Vale of Brazil, Rio and a number of other smaller iron ore miners in Australia (Fortescue, Mount Gibson) have cut production by 10% per cent or more in response to the sharp downturn in demand from steelmaking customers in China and elsewhere.
The world’s biggest steel-maker, ArecleorMittal is cutting global output by up to 35% this quarter in reaction to the downturn in demand, especially in the US, India and Europe. Overnight it revealed plans to cut 9,000 jobs and try and save $US1 billion in operating costs.
It will be cutting its offtake of iron ore coal and other steel-making materials, so its just not China that is showing the strain.
Mr Kloppers said BHP Billiton had excellent customer relationships and had been able to maintain sales volumes through a combination of long term contracts and sales volumes.
He said he could not predict demand for the next few months but believed the company’s financial strength and low position on the cost curve meant BHP Billiton was better placed than its competitors to respond to fluctuating demand for its products.
BHP had a strong balance sheet and cash flow and he said that would allow "us to take advantage of these opportunities as they arise and as other falter".
"In terms of operational strategy, our policy is very clear cut.
"If market conditions change to the extent that any of our operations are cash negative and are set to remain cash negative for some time, we will respond accordingly.
"In terms of demand for our products in the current climate, I cannot stand here today and predict what demand from our customers will be over the next few months.
"There is no doubt that these are very challenging times, uncertainty in the shorter term outlook remains and we do not expect to be immune from the changes in the world economy.
"Having said that, if these conditions persist and any significant production cuts become necessary, we will advise our shareholders and the market accordingly.
"In terms of other opportunities, it is important to note that the strong balance sheet and cash flow I’ve discussed already will allow us to take advantage of these opportunities as they arise, and as others falter in this climate.
"Don has spoken in detail about the changing market conditions and how they impacted the value and risks implicit in the Rio Tinto transaction, so I don’t intend to cover the same ground here other than to say this w
