BHP faces the problem of China moving 'ex-growth'
Published 16/11/2015 | 02:30
It doesn't seem all that long ago when Irish business people were not just knowledgeable about base metal mining, but you couldn't pass a sheebeen on the Wild Atlantic Way without someone offering you a tip about the latest mining hopeful and the assurance that the shares were about to 'go through the roof.'
Whim Creek, an Australian company, was only one of those junior explorers which every now and then held out the promise of untold riches. The farther away the company was, it seemed, the more tempting it was for Irish punters.
The mining world has got a lot more consolidated since those times and a lot mightier. I'm sure somewhere in the world there are people whispering about assay results and making surreptitious calls to their brokers, but geo-politics seems now more important to the mining industry than geology. That's the case with the company we are examining today, the Aussie giant, Broken Hill Properties (BHP).
Just now, all is not well with BHP. To understand why, the investors need to understand the vast impact the emergence of China as an industrial power has had on giants like BHP. They went through a boom never before seen. BHP bought its massive rival Billiton in 2001, giving it the ability to feed the voracious Chinese appetite for ores and energy. But China, as everyone knows, is moving 'ex-growth'. BHP is rapidly de-merging; most of Billiton's assets are going into a new company, South 32, with its own listing. In essence the company has admitted that the consequence of diversification was a loss of focus, probably capital indiscipline and the need to generate more value from its high quality assets.
Formed 130 years ago, BHP today is a leading global resource company. It is the largest exporter of coal, a top-three supplier of iron ore, a leading supplier of copper and a substantial investor in oil and gas. The company is in the business of exploration, development and the production of commodities, with locations from Peru to Pakistan, Australia to Algeria, Chile to Colombia and Brazil to Canada.
The company focuses on five principal areas; petrol, potash, iron ore, copper and coal. Its iron ore business is the largest revenue generator but last year sales collapsed over one third to $14bn. The coal business revenue has remained consistent at $6bn for the last three years but profits have been under pressure. Not surprising revenue for petrol and potash dropped from $13bn to $11bn and profits dropped a significant 60pc. Its copper business centred in Chile, has felt the commodities shake-out in a big way. Sales of copper last year were $11bn, down from $13bn in each of the previous three years.
BHP operates as a dual listed company; BHP Ltd in Australia and BHP Plc in London. However it operates as a single entity and has a single board. Group revenue last year was $46bn down from $57bn the previous year. Profits from operations plunged a staggering 70pc. This drop in revenue and profits is reflected in its share price which has fallen from 2400p in early 2011 to 880p today. The share price was not helped by its recent dam failure disaster at its mine in Brazil. Iron ore revenues, the group's major revenue producer, dropped by almost a third last year and petrol by a fifth. However the trading outlook is not encouraging, with oil and gas revenue expected to reduce by 7pc next year, copper by 12pc, but a slight improvement is expected in the iron ore market. The company plans slashing capital expenditure to $7bn by the end of next year; this is from $21bn in 2013 and this should help dividend payments. BHP's dividend has not been cut for decades. Can this continue? Some think it can, as the company is committed to a steady rise in dividends but other analysts are of the opinion that it is questionable-unaffordable. While the company has a solid 'A' capital rating and intends to maintain it but in the short term, the share price will struggle and is not one to chase right now.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.