It might have been the weakest first half profit in four years, but BHP Billiton did better than analysts had forecast, nudged its US dollar denominated dividend a touch higher and made the right cautious noises about the chances of a sustained global recovery.
It also didn’t announce any capital management moves, as some hopeful analysts had been suggesting, but did leave the impression that such a move might happen, whenever.
It signalled its intent however, by boosting capex plans 63% to $US20.8 billion, all of it on new ones or expansions of existing operations.
Underlying profit for the December half of $US5.702 billion ($6.5 billion) was around 11% better than what the market had been forecasting.
But the company is waiting to see how events in its most important market, China, pan out as that country tightens controls on bank lending and stiffens monetary policy to try and clip the rapid growth in some sectors.
It warned that the pace of this monetary tightening and the rate of loan growth for commodity-intensive sectors in China would be critical in the near term.
"We do not expect China to stop lending, however, reduced credit liquidity in key segments of the commodity market may have a flow-on impact on prices," BHP Billiton said in yesterday’s announcement.
BHP shares rose as much as 4%, but that was wound back during the day and it finished up just 3c at $39.88.
Some analysts were a bit unhappy it seems about the outlook and about comments from management that they were seeing cost pressures from labour shortages.
But they should really get a grip. The company is well run, conservatively so given the still unclear world economic picture.
As the Financial Times commented overnight, BHP is resource and options-rich, with the best balance sheet in the sector.
The latest half was nowhere near as bad as some had thought.
While underlying profit fell 22%, the gross profit margin eased from 46.8c in the dollar to "only" 40.7c.
The company reported net gearing of 15.1%, net debt of US$7.9 billion, and interest cover from underlying profit of 42 times, which was down from 85 times in the December 2008 half.
The interim dividend was increased 2.4% from 41 US cents to 42 US cents.
But in Australian dollar terms, the size of the payout has fallen by more than 20% year on year.
BHP has yet to nominate the exchange rate that will apply to the payment when it is made on March 23.
The rate that will apply will be nominated on March 5 which is also the record date for the payment after the stock goes ex-dividend on March 1.
At yesterday’s exchange rate of just over 87.50 US cents, the 42 US cents a share payment (which is fully franked) works out at 47.95 cents a share, down from the previous interim dividend that translated to 65 Australian cents.
But what shareholders have to understand is that the previous dividend of 41 US cents was paid when the Aussie dollar traded around 68-70 US cents.
It was low because investors had become scared of risky assets, such as those priced in Australian dollars, and demand for commodities had been dragged down by the credit crunch and recession.
What shareholders have to understand is what is good for BHP in the market place (rising demand and prices) is also good for the Australian dollar (hence the rise in the past year), but bad for them when the US dollar dividends are translated into Aussie currency.
Despite the company’s caution, there is ample room to lift dividend as earnings were $US1.102 (down from $US1.10 in the previous corresponding half year).
A recovery in prices has already happened, and more rises are expected. Demand for iron ore and coal has come from China’s rebound, and a slow rise in demand from other economies
The second half is expected to be better, driven by the surging demand from China for iron ore and coal.
That could see price hikes of about 30%-40% for iron ore and as much as 50% for coking coal from April 1.
The falls in the company’s iron ore revenues and profits were well-anticipated by the market but will reverse in this half because of the above two factors, stronger demand (including from Japan and South Korea) and the expected price rises (which would match spot prices anyway).
"Notwithstanding our caution in the short term, over the long term we continue to expect emerging economies’ growth to strongly outperform the developed economies," the company said.
"Our strong balance sheet continues to give us significant flexibility to progressively grow production capacity, return to shareholders and opportunistically consider acquisitions," it said.
The big question now for BHP is whether competition authorities in Europe and China will allow it to go ahead with the $US116 billion Pilbara iron ore joint venture with Rio Tinto, which would save the miners more than $US10 billion.
The European Commission has started studying the proposal. No timing for a decision has been given.
Steelmakers, especially those in China and Japan, oppose the planned merging of the production arms from the world’s second and third largest iron ore miners.
The combined annual output of more than 350 million tonnes would overtake Brazil’s Vale (which is in the process of boosting its output to around 420 million tonnes over the next few years).
BHP’s July-December underlying profit before one-offs fell 7% to $US5.702 billion ($6.5 billion),
