MINING FINANCE / INVESTMENT

Inside BHP Billiton's machine

Now-historic earnings for the 2008 financial year already show significant inter-commodity volatility, leaving little room for flexibility going forward.

JOHANNESBURG - 

BHP Billiton, the world's biggest diversified resources company, produced a market-pleasing set of results for the fiscal year to 30 June 2008, as underlying EBIT (earnings before interest and tax) increased by 21% to USD 24bn. The group expressed confidence going forward, and was keen to emphasize its strengths relative to Rio Tinto, no 2 global miner, which BHP Billiton continues to keep in its predatory sights.

While the current 12 months hold all kinds of challenges for resources companies, BHP Billiton has, like its peers in differing degrees, already produced a set of greatly mixed EBIT data for its 2008 fiscal year. Unusual among mining groups, BHP Billiton operates an oil & gas division, which produced USD 2.5bn extra EBIT in 2008, for a total of USD 5.5bn.

The base metals division - led by copper, given that BHP Billiton counts aluminium and nickel in other customer segments - was by far the biggest profits contributor, with some 33% of group EBIT. However, EBIT from the stainless steel materials segment, which represents BHP Billiton's nickel output, fell by a massive USD 2.4bn to USD 1.3bn, more than reflecting the near halving in spot dollar nickel prices over the past 12 months

Iron ore contributed an extra USD 1.9bn in 2008, for a total of USD 4.6bn, reflecting BHP Billiton's position as No 3 in the global seaborne iron ore market, after Brazil's Vale, and Rio Tinto. The great sleeper in the BHP Billiton portfolio during 2008 was, without question, manganese, where EBIT increased 550% from USD 253 to a monumental USD 1.6bn. Coking (metallurgical) coal was a disappointment, put down mainly to impossibly wet conditions at Queensland Coal during January and February this year.

Energy prices have been beaten down, in particular, for the past 30 days. Along with the continued downward tendency in metals prices, BHP Billiton would be relying, at least in part, on new and expanding production across various divisions during its 2009 fiscal year.

In expressing its outlook, BHP Billiton placed specific emphasis on nations where demand for raw materials has been running way ahead of the historic mean: "in light of differing activity for the developed and emerging market economies, there have been mixed spot prices for key commodities".

It noted, in particular, that "bulk and energy related commodities have tended to outperform the LME traded metals. The effects of current weaknesses in the developed economies on demand for our commodities should be minimal driven by ongoing strong demand from the emerging economies". Significant contractual increases were won earlier this year for key bulk materials, seaborne iron ore, and seaborne coal, two areas that play a huge role for BHP Billiton, Rio Tinto and Vale.

Relative to its peers, BHP Billiton remains well placed going forward. Rio Tinto may be seen as somewhat overexposed to aluminum and copper, while Vale is paying the price for the expensive and dramatic expansion of its nickel division. Anglo American remains heavily exposed to platinum group metals, where spot prices are tumbling, while Xstrata faces headwinds from copper, nickel, zinc, and lead.