BHP Billiton (LSE:BLT, Financial)(BHP, Financial)(BBL, Financial)(ASX:BHP, Financial)(FRA:BIL, Financial), the $97 billion giant miner, delivered its half-year results in February. For BHP Billiton’s six months operations that ended in December, the miner reported an impressive 19.6% sales growth to $18.8 billion and $3.2 billion in profits – compared to $5.7 billion losses the same period last year.
As observed, BHP Billiton exhibited fewer expenses excluding net finance costs and related impairments, which helped lift the company to profits.
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"This is a strong result that follows several years of a considered and deliberate approach to improve productivity and redesign our portfolio and operating model. Our steadfast commitment to this plan has positioned us to take full advantage in a period of higher prices with underlying EBITDA up 65% to $9.9 billion.
"The demerger of South32 and over $7 billion of asset sales have shaped a portfolio that is now true to its strategy. Our assets are large, long-life and low-cost and provide exposure to a diverse mix of commodities with an attractive outlook. Our new operating model has sharpened the focus of our operations on the things that matter most: safety, volume and cost. A decline in unit costs at our major assets supported $1.2 billion of productivity gains in the half, which follows the $11 billion of annualized gains embedded over the last four years.
"Greater productivity and increased capital efficiency supported strong free cash flow generation of $5.8 billion. Strict adherence to our capital allocation framework has maximized the use of this cash. We have strengthened our balance sheet, with net debt falling sharply to close the period at $20.1 billion. As we further strengthen the balance sheet our ability to invest counter-cyclically will only be enhanced. Our minimum 50% dividend payout policy equates to 30 cents per share. In recognition of the importance of shareholder returns and confidence in the company’s performance, the Board has determined to pay an additional amount of 10 cents per share, taking the overall interim dividend to 40 cents per share."Â –Â BHP Billiton CEO Andrew Mackenzie
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BHP Billiton shares fell 2.31%. day after earnings news release.
Valuations
BHP Billiton is currently much more expensive compared to its peers. According to GuruFocus, the miner had trailing price-earnings (P/E) ratio of 38 times vs. industry median 20 times, price-book (P/B) value of 1.7 times vs. industry median 2 times, and price-sales (P/S) ratio of 3.1 times vs. industry median 1.8 times.
BHP Billiton had trailing dividend yield of 2.97% with 65% payout ratio.
On average 2017 sales and earnings-per-share estimates, BHP Billiton would have P/S and P/E ratios of 2.4 times and 24.3 times.
Total returns
In the past year, BHP Billiton ADR shares exceeded total returns provided by the broader Standard & Poor's 500 index with 46.3% in comparison to the index’s 16.3%, according to Morningstar data. In the past five years, however, the miner returned a total loss of 7.2% compared to the index’s 7.4% total gains.
BHP Billiton
BHP Billiton was created in 2001 through the merger of the Australian Broken Hill Proprietary Co. Ltd. and the Anglo-Dutch Billiton PLC. Broken Hill was founded in 1885 while Billiton was founded in 1860.
In its filings, BHP Billiton is among the world’s top producers of major commodities including iron ore, metallurgical coal, copper and uranium. The company also has substantial interests in oil, gas and energy coal.
(Annual Report)
In the previous fiscal year that ended June 2016, BHP Billiton derived 42.6% or $13.2 billion of its sales from China followed by 14.5% from North America, 9.5% from Japan, 9.2% from Rest of Asia, 6% from Australia and followed by India, Europe, South America and the rest of the world.
BHP Billiton had four reportable segments: Petroleum, Copper, Iron Ore and Coal.
(Annual and Financial Report)
Petroleum
The segment’s principal activities include exploration, development and production of oil and gas.
During the six months that ended in December, BHP’s Petroleum sales declined by 13% to $3.3 billion or 18% of total company sales –Â excluding adjustments and eliminations. Petroleum business also delivered an underlying EBIT* margin of 10.9% compared to -5.2% (loss) the year prior.
*BHP Billiton: Underlying EBITDA is earnings before net finance costs, depreciation, amortization and impairments, taxation expense, discontinued operations and any exceptional items. Management believes focusing on underlying EBITDA more closely reflects the operating cash generative capacity and hence the underlying performance of our business. In past periods, we have reported underlying EBIT as a key non-IFRS measure of operating results.
(Annual and Financial Report)
Copper
The segment’s principal activities include mining of copper, silver, lead, zinc, molybdenum, uranium and gold.
In the recent six months, Copper sales grew 8.1% to $4.2 billion or 23% of total sales excluding adjustments and delivered an underlying EBIT margin of 21.7% compared to 2.6% the year prior.
(Annual and Financial Report)
Iron Ore
The segment’s principal activities include mining of iron ore.
In recent months, iron ore sales grew by 29.6% to $6.93 billion or 38% –Â highest revenue contributor –Â of total sales excluding adjustments and reported an EBIT margin of 46.6% (highest profitable segment)Â compared to 36% the year prior.
(Annual and Financial Report)
Coal
The segment’s principal activities include mining of metallurgical coal and thermal (energy) coal.
In the recent six months, coal business grew the most with a 68% rate to $3.93 billion or 21% of total sales excluding adjustments and reported an impressive 41.5% EBIT margin compared to -14.6% (loss) the year prior.
Sales and profits
(Annual and Financial Report)
Cash, debt and book value
As of December, BHP Billiton had $14 billion in cash and cash equivalents, and $34 billion in debt having a debt-equity ratio of 0.61 times compared to 0.65 times in the same period the year prior; 3.4% of BHP Billiton’s $120 billion assets were labeled as intangibles and had a book value of $56.6 billion compared to $55.8 billion last year.
Cash flow
(Financial Report)
Six months into fiscal 2016, BHP Billiton was able to grow its cash flow from operations by 46.3% to $7.7 billion. As observed, most cash flow generated came from profits, payables and dividends received.
Capital expenditures –Â including exploration expenditure and related expensed –Â sum up to $2.4 billion leaving BHP Billiton with $5.26 billion in free cash flow compared to $1.09 billion in the first half of the year prior.
(Annual Report and Financial Report)
The Australian miner also provided a lot less dividend payouts last year compared to its previous years in operations.
(Annual Report and Financial Report)
BHP Billiton also appeared to be a net debt payor recently having allocated $1 billion in repayments including proceeds received for the period.
Conclusion
There is no doubt that BHP Billiton has survived and has slowly been recovering from the materials and mining sector downturn in recent times. All segments experienced positive high single-digit to 60%-plus growth in the recent six months of operations except for the miner’s petroleum business.
The miner showed smart cash allocation with a little focus on lowering overall debt –Â BHP still carried a leveraged balance sheet .
(BHP Billiton Share Price and Price-Book Ratios, GuruFocus)
The miner recently received an upgrade to buy from Investec. Meanwhile, four analysts had an average target price of $39.93 per share or 8.3% higher than today’s share price of $36.86. This target price would also indicate a forward P/E multiple of 26.6 times –Â about twice BHP’s five-year earnings multiple average.
Certainly, results for the recent months were helped by less charges including the Samarco dam failure** where the damages costed BHP Billiton about $2.2 billion after taxes, according to filings. There also have been new troubles associated with BHP’s copper mining operations in Escondida –Â 57.5% owned and leading copper producer.
In 2016, Escondida operations generated $4.88 billion in revenue or 16% of total BHP Billiton sales –Â excluding adjustments. Reuters, meanwhile, reported that the 43-day strike ended temporarily few weeks ago.
In summary, optimism is already very high including associated risk making BHP Billiton a pass.
Notes
**On Nov. 5, 2015, the SamarcoMineração S.A. iron ore operation in Minas Gerais, Brazil, experienced a tailings dam failure that resulted in a release of mine tailings, flooding the community of Bento Rodrigues and impacting other communities downstream (Samarco dam failure).
Samarco is jointly owned by BHP Billiton BrasilLtda and Vale S.A. (Vale). BHP Billiton Brasil’s 50% interest is accounted for as an equity accounted joint venture investment
Any charges relating to the Samarco dam failure incurred directly by BHP Billiton Brasil or other BHP Billiton entities are recognized 100% in the group’s results.
In other news: Elliot Management wants BHP to spin off its oil business, among other, to generate more shareholder value –Â which BHP declined to do (Bloomberg).
Disclosure: I have shares in BHP Billiton.
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