All glorious at BHP, even its nickel and mine outfit

THE downgrading of charges against Rio Tinto's iron ore marketing man in China, Stern Hu, is good news for BHP Billiton as much as it is for Hu and his boss.

Until Beijing ordered a softening in the charges from crimes against the state to the more sedate allegations of bribery and the stealing of commercial secrets, there was a genuine fear that there would be no end to the punishment Rio would cop for, firstly, turning its back on national champion Chinalco and, secondly, for striking a new benchmark iron price that wasn't in the ballpark the Chinese wanted to play in.

Against that backdrop, BHP and Rio have been working away at pinning down a definitive and binding agreement covering their proposed iron ore production joint venture in the Pilbara, one that is set to deliver $US10 billion ($A12 billion) in synergy benefits. News of the production joint venture was a double whammy for the Chinese when it was announced in June.

Not only did it heighten their fears of increased price control for the producers, it was also a key element in Rio's decision to junk its refinancing deal with Chinalco, with BHP to pay Rio a $US5.8 billion equalisation payment to put their two Pilbara operations on an equal footing going into the 50:50 joint venture.

For BHP, it is the next best thing to owning Rio's (much bigger) Pilbara iron business outright the key motivation of last year's aborted scrip offer by BHP for the reluctant Rio. So anything that could threaten to derail the dream combination in the Pilbara was always going to cause concern at BHP.

Not that BHP chief executive, the uber-cool Marius Kloppers, wanted to give that impression yesterday. Speaking at the media conference call for BHP's June-year profit, Kloppers said the Hu case was not a consideration in the ongoing work between BHP and Rio on arriving at the definitive and binding agreement on the iron production joint venture before the December 31 deadline.

"The work is continuing in the background, pretty much unabated it's progress as anticipated at this stage," was how Kloppers put it. There's no doubting that. But there is also no doubting that BHP can now sleep easier. The potential for some left-field punitive action by Beijing against Rio and its soon-to-be-joint-ventured iron ore export business has eased.

As previously mentioned, Kloppers was speaking at the release of BHP's June-year profit report. He was in London where he said he had been enjoying a "glorious summer".

The temptation is to use that as a metaphor for the BHP profit, an above-expectations result of $US10.72 billion. While down 30 per cent on $US15.36 billion previously, it masked the fact that BHP enjoyed record net operating cash flow of $US18.9 billion. Against a backdrop in which commodity prices slumped big time after the mid-September start to the global financial crisis, BHP was still able to crank up the annual dividend by about 17 per cent, pay down debt to a negligible in BHP terms $US5.6 billion and invest nearly $US11 billion in growing the business.

All that when the rest of the resources sector was suffering much greater profit downturns, forcing the lemming-like response of blowing their capital bases through highly dilutive share issues, in some cases just to survive. Not so for BHP. Its ability to invest through the cycle while all others are sidelined is without question.

That was the temptation, anyway. It is the attributable profit line that removes the temptation. Financial crisis or not, BHP's net exceptional items figure of $US4.84 billion for the June year is not a badge that our leading company can wear with any pride, particularly as it is not strictly crisis-related. The bulk of it was the stuff-up with the now-closed Ravensthorpe laterite nickel project in Western Australia and the associated investment in the since sold Yabulu nickel refinery in Townsville.

The shorthand for the Ravensthorpe/Yabulu closures/sales was that the collapse in nickel prices forced BHP's hand. But the reality was that BHP got the mining side of Ravensthorpe horribly wrong. It should not have happened. As BHP crowed when the decision to go ahead at Ravensthorpe was made, it was meant to have the benefit of learning from the mistakes made at the trailblazing laterite projects in Australia, Murrin Murrin and Cawse.

That Ravensthorpe closed within months of being officially opened tells us that something went horribly wrong. BHP has presumably subjected the affair to the sort of peer review process that normally follows such stuff-ups. The hope now is that its own expensive lessons will be spread across the business.

Ravensthorpe is up for sale. Given industry estimates are that it will take $500 million to fix the mine's problems, BHP will have to wear the laterite stigma for a long time as buyers for the asset won't exactly be beating down the door.

Some in the market have suggested now might be the time for BHP to get out of nickel. The Chinese have effectively capped future nickel price rises at no more than $US12 a pound thanks to their ability to get away with producing pig iron nickel, a filthy business if there ever was one.

But Kloppers killed off that talk. He said BHP wants to grow what remains of its nickel business, even if there is a cap to the upside on prices. He did not mention that, apart from anything else, there just aren't the buyers out there at the moment, excluding the Chinese, of course.

Malcolm Maiden is on leave.