Crashing commodity prices weighed heavily on BHP Billiton Limited's (ASX: BHP) earnings results with the mining behemoth reporting a net profit of US$4.27 billion for the half-year ended 31 December 2014, representing a 47.4% decline on the prior corresponding period (pcp).
However, its underlying attributable profit was US$5.4 billion (down 31%), which was significantly better than the US$4.9 billion that analysts had been expecting, as reported by Bloomberg.
So What: BHP Billiton is the world's largest and most diversified mining stock, with operations primarily spanning across the iron ore, petroleum, coal and copper markets. However, each of these commodities have come under enormous pricing pressure and this is acting as a heavy drag on the business's overall earnings.
The miner said that the average realised price of iron ore (which is its most important commodity) decreased by 38% over the half to US$70 a tonne, which significantly impacted profitability. Oil, which is BHP's second most important commodity, has also nearly halved in value over the last eight months, while coal and copper are both hovering near multi-year lows.
BHP managed to offset some of this pressure by cutting capital spending and exploration by 23% to US$6.4 billion, while US$2.4 billion in productivity gains were achieved during the period. However, underlying EBITDA (earnings before interest, tax, depreciation and amortisation) still fell 12% to US$14.5 billion, while revenues fell 11.9% to US$29.9 billion.
Here are some of the other highlights from the report:
- Underlying EBIT (earnings before interest and tax) of US$9.2 billion
- Underlying EBIT margin of 32%
- US$4.1 billion in free cash flow
- Aiming for over US$4 billion of productivity gains by the end of the 2017 financial year
- More reductions will be made to capital and exploration expenditure. Spending in 2015 will be cut to US$12.6 billion and US$10.8 billion in 2016
- Net debt fell to US$24.9 billion, significantly below what many analysts were expecting
- US 62 cent dividend per share (fully franked), up 5% on the prior corresponding period
Now What: In light of the miner's crumbling profitability, its decision to increase its dividend seems like a strange move, although it will almost certainly keep investors happy in the near-term. BHP Billiton will also push for the demerger of its non-core assets into South32 Ltd, which it believes will further boost shareholder returns.
However, investors need to remember to focus on the long term. It is widely expected that commodity prices will continue to fall over the coming years and, while BHP Billiton might be one of the world's lowest cost producers, its margins and cash flows will still come under pressure. Until the stock falls even further than today's level, investors may want to consider other high-yielding alternatives for now.
