Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss with you the BHP Billiton (ASX: BHP), operation report for the quarter ending September 30, 2014, which was released on Wednesday, October 22, 2014.
COMPANY PROFILE:
BHP Billiton is an Anglo-Australian multinational mining, metals and petroleum company headquartered in Melbourne, Australia. It is the world’s largest mining company measured by 2013 revenues.
The company was created in 2001 through the merger of the Australian “Broken Hill Proprietary Company Limited” (BHP) and the Anglo–Dutch Billiton plc.
Below images show the former respective logos of “Broken Hill Proprietary” (BHP) and Billiton plc.
On August 19, 2014, BHP Billiton announced the company would be split in two.
- The main company will focus on the major iron ore, coal, copper and petroleum assets.
- A newly formed entity named NewCo would house the company’s non-core asset, such as aluminium, coal, manganese, nickel and silver and would be listed on the Australian Securities Exchange.
“BHP Billition Ltd” operates a wide variety of mining, processing and oil and gas production.
In FY2014, the company workforce consisted of approximately 123,800 employees and contractors at 130 locations in 21 countries.
At the close of trading day on October 24, 2014, it had a market capitalization of approx. 160 Billion.
OPERATION RESULTS Q2-2014, HIGHLIGHTS:
Group production increased by 9% during the period with records achieved for eight operations and four commodities. Production guidance remains unchanged and is on track to deliver Group production growth of 16% over the two years to the end of the 2015 financial year.
FY 2015 guidance remains on track for production of petroleum, copper, iron ore, metallurgical coal, and energy coal, BHP Billiton reported on Wednesday.
IRON ORE:
Iron ore production jumped 17% to a record 57 million metric tons in the September 2014 quarter. Total iron ore production is forecast to increase by 11% in the Fiscal Year 2015 to 225 Mt, which complies with prior guidance.
- Western Australia Iron Ore production increased 15% to a record 62 million metric tons.
- In addition to strong operations performance at the mine, a higher proportion of direct to ship ore increased outflow capacity at port and facilities record sales volumes of 63 Mt.
- The company expects unit cash costs of less than US$ 20 per ton in the medium term, a 25% reduction on the average achieve in Fiscal Year 2014.
COAL:
- Metallurgical coal production increased 25% to 13 million metric tons during the September 2014 quarter as Queensland Coal achieved record quarterly production and sales volumes.
- Illawarra Coal output soared 64% during the same quarter to 2.3 Mt as productivity increases enabled the mine to achieve record run-of-mine production.
- However, energy coal production declined by 9% during the September 2014 quarter to 18 Mt, due to adverse weather conditions in Columbia and at New South Wales in Australia.
- Coal production also declined at the Navajo Coal operation in New Mexico following the permanent closure of three of the five power units at the Four Corners Power Plant.
- Total energy coal production of 73 Mt is expected for the Fiscal Year 2015, consistent with prior guidance.
COPPER:
BHP Billiton reported copper production declined by 3% during the September 2014 quarter to 389000 metric tons. However, guidance for the Fiscal Year 2015 remains at 1.8 Mt.
- Escondida copper production decreased by 3% due to a 12% decline in ore grade, a two-day strike, and a power outage throughout Northern Chile.
- At Pampa Norte, production was up 28% to 56 000 metric tons, as Spence benefited from higher grades and recovery.
- While Olympic Dam copper production substantially increased by 41% in the September quarter to 39 kt, the completion of planned smelter maintenance led to a 28% decline in output from the June 2014 quarter.
- Antamina copper production plunged by 39% in the September 2014 quarter to 26 kt due to lower grades.
PETROLEUM:
Total petroleum production increased 7% in the September 2014 quarter to 67.4 million barrels of oil equivalent. Guidance for the 2015 financial year remains unchanged at 255 MMboe (Million Barrels of Oil Equivalent)
- Crude oil, condensate and natural gas liquids production increased by 19% to a record 30.9 MMboe in the September 2014 quarter.
- Natural gas production of 2019 bcf (billion cubic feet) was unchanged in the September quarter.
ALUMINIUM, MANGANESE & NICKEL:
Aluminium:
Aluminium production was unchanged in the September 2014 quarter at 1.2 Mt, due to record production at the Alumar refinery.
- However, aluminum production decreased by 16% during the same quarter to 261 kt, due to the cessation of smelting activities in June 2014 and the suspension of capacity at the Alumar smelter during the 2014 financial year.
Manganese:
Manganese ore production declined 12% in the September 2014 quarter to 36 Kt, primarily as a result of the closure of the Perseverance underground mine at Nickel West in November 2013.
Nickel:
“Consistent with prior guidance, we expect sale-able nickel production at Nickel West to decline by 4% in the 2015 financial year to 95 kt,” said BHP Billiton. “Ferro nickel production at Cerro Matoso is expected to decline by 3% to 43 kt as a result of lower grades and recoveries.”
PGM CAPITAL COMMENTS:
BHP Billiton’s historic US$15 billion spin-off, Separated via a demerger, has the potential to unlock shareholder value by significantly simplifying the BHP Billiton Group (‘Group’) and creating two portfolios of complementary assets.
Once simplified, BHP Billiton will almost exclusively be focused on its exceptionally large, long-life iron ore, copper, coal, petroleum and potash basins. With fewer assets and a greater upstream focus, the Group will be able to reduce costs and improve the productivity of its largest businesses more quickly. As a result, its portfolio is expected to generate stronger growth in free cash flow and a superior return on investment.
On August 19 the company presented its financial report for its FY-2014 that ended on June 30, 2014 with the following highlights:
- Total revenue was 67.2 billion US-Dollars an increase of 2 percent compared with fiscal year 2013.
- Net Operating cash flow of 25.4 billion US-Dollars an increase of 26 percent compared with the previous fiscal year.
- A total dividend per share of US$ 1.21 an increase of 4 US-Dollar cents, compared with its dividend of Fiscal Year 2013.
Below figure shows the distribution of the total FY-2014 earnings the current BHP Billiton when we divide them between of the simplified BHP Billiton Group and “NewCo”.
After reviewing above figure, the critical reader will agree with us that BHP Billiton is separating the assets it doesn’t want into “Newco”
We believe that BHP Billiton by separating it aluminum, manganese and nickel assets, and placing them into “Newco” is creating shareholders value for investors in the simplified “BHP Billiton” after completion of the proposed demerger.
The aluminum sector, due to its energy intensive production on the one hand and lack of pricing power on the other, has become the black sheep of most of the big mining companies, for which reason we have seen them selling or demerging their aluminium sector in order to create shareholders value.
It is also worth mentioning that the company was able to increase its profit and subsequent dividend, despite the slump in commodity prices.
As can be seen from below chart, the share of the company, which has increased in value with over one thousand percent over the last 12 years, has been trading sideways since mid 2011, despite the company’s fundamentals.
With a Price to Earnings ratio of 11.4, a Price to Book of 1.98 and a dividend yield of 4.21 percent we have a BUY rating on the stock of the company.
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Until next week.
Yours sincerely,
