Mining's model citizen
The quality of its assets, the diversity of its cash flows and a modest level of gearing have placed BHP in an enviable position at a time when most of its competitors are being forced to de-risk their balance sheets permanently.
At first glance the BHP Billiton result may not have looked too flash, with bottom line earnings of "only" $US2.6 billion – down 56.6 per cent on the previous corresponding half-year. In the current climate, particularly within the resources sector, however, what really matters is not only absolute strength but relative strength. BHP has both to a remarkable degree.
The combination is important because it enables both survival and the opportunity to capitalise on the relative weakness of rivals, particularly those battling to survive.
In absolute terms, BHP goes into these challenging conditions for the sector in, what Marius Kloppers described as, "fantastic" shape. Before exceptional items (the largest of which was the writing off of the Ravensthorpe nickel project), its earnings rose 2.2 per cent to $US6.1 billion.
More particularly, it has net debt of only $US4.2 billion, gearing of 9.5 per cent and gross cash flows of $US13 billion (net cash flow was $US4.3 billion).
Relative to its peers, BHP is, as Kloppers has repeatedly said, in a unique position, with a unique opportunity to capitalise on the fact that most of them have too much debt and don't have BHP's diversity of cash flows.
While they are shutting down their project pipelines and, in some instances, making forced sales of assets to reduce their debts, BHP continues to invest and to look for opportunistic acquisitions. It has about $US17 billion of new projects under development and will spend more than $US20 billion on exploration and development over this financial year and the next.
In contrast, according to BHP, the sector as a whole has announced plans to slash investment, from the peak of $US116 billion in 2008 to only $US62 billion this year and an estimated $US52 billion in 2010. According to a chart in its results presentation, BHP is probably one of a handful of miners – and the only major – which doesn't need operational or financial restructuring to protect its credit rating or to ward off financial distress.
The reason for the stresses within the sector is well understood. It rode the dramatic surge in commodity prices up, investing more than half a trillion US dollars in new production over the course of the boom, and is now riding them down.
The average fall in the prices of BHP's portfolio of commodities, Kloppers said, was between about 50 per cent and 60 per cent. He went on to say that prices had fallen another 10 per cent or so since December.
The abrupt and dramatic fall in capital investment and the severe pressures on earnings and balance sheets means that when stability eventually returns those in survival mode will be smaller and weaker than the handful that, like BHP, are able to invest through the downturn in either high quality organic projects or by acquiring assets from distressed competitors.
The problems for rivals like Rio Tinto, is that even if there is some recovery they will still be focused on de-risking and will also be permanently diminished, relative to BHP, by the decisions they are forced to take during the downturn, like the sale of equity in some of its best assets to China's Chinalco that Rio is contemplating or the mothballing of key growth projects.
Stability might not be that far away. As my colleague, Robert Gottliebsen has noted today (The big, robust Australian, February 4) Kloppers said that in iron ore at least, China appears to have completed its destocking.
Citibank's head of Asia Pacific economic and market analysis, Huang Yiping, recently told Business Spectator (KGB Interrogation, January 23) that Citibank's relatively optimistic forecasts for China's growth prospects was partly predicated on its view that inventories of commodities were being slashed quite dramatically and that he expected the inventory adjustment to be completed during the first quarter of this year.
As Kloppers says, once the stockpiles have gone, pricing will be determined by the balance between supply and demand – a market-clearing price will emerge – and the true level of demand will become clearer. Iron ore prices, in the spot market at least, have been rebounding.
Whether or not some level of stability emerges in commodity prices, and whether or not prices and volumes improve, BHP emerges as a winner because of the quality of its balance sheet and the strength and diversity of its cash flows.
The more distress there is the sector the greater the distance between it and the rest when the recovery comes. If it comes earlier, it is better placed to exploit it and to leverage its exposure to it than anyone else in the sector.
It's an enviable position to be in, but will place enormous responsibility on Kloppers to deploy his advantage in ways that maximises the competitive gains while minimising the risks of mistakes that could fritter it away.
The combination is important because it enables both survival and the opportunity to capitalise on the relative weakness of rivals, particularly those battling to survive.
In absolute terms, BHP goes into these challenging conditions for the sector in, what Marius Kloppers described as, "fantastic" shape. Before exceptional items (the largest of which was the writing off of the Ravensthorpe nickel project), its earnings rose 2.2 per cent to $US6.1 billion.
More particularly, it has net debt of only $US4.2 billion, gearing of 9.5 per cent and gross cash flows of $US13 billion (net cash flow was $US4.3 billion).
Relative to its peers, BHP is, as Kloppers has repeatedly said, in a unique position, with a unique opportunity to capitalise on the fact that most of them have too much debt and don't have BHP's diversity of cash flows.
While they are shutting down their project pipelines and, in some instances, making forced sales of assets to reduce their debts, BHP continues to invest and to look for opportunistic acquisitions. It has about $US17 billion of new projects under development and will spend more than $US20 billion on exploration and development over this financial year and the next.
In contrast, according to BHP, the sector as a whole has announced plans to slash investment, from the peak of $US116 billion in 2008 to only $US62 billion this year and an estimated $US52 billion in 2010. According to a chart in its results presentation, BHP is probably one of a handful of miners – and the only major – which doesn't need operational or financial restructuring to protect its credit rating or to ward off financial distress.
The reason for the stresses within the sector is well understood. It rode the dramatic surge in commodity prices up, investing more than half a trillion US dollars in new production over the course of the boom, and is now riding them down.
The average fall in the prices of BHP's portfolio of commodities, Kloppers said, was between about 50 per cent and 60 per cent. He went on to say that prices had fallen another 10 per cent or so since December.
The abrupt and dramatic fall in capital investment and the severe pressures on earnings and balance sheets means that when stability eventually returns those in survival mode will be smaller and weaker than the handful that, like BHP, are able to invest through the downturn in either high quality organic projects or by acquiring assets from distressed competitors.
The problems for rivals like Rio Tinto, is that even if there is some recovery they will still be focused on de-risking and will also be permanently diminished, relative to BHP, by the decisions they are forced to take during the downturn, like the sale of equity in some of its best assets to China's Chinalco that Rio is contemplating or the mothballing of key growth projects.
Stability might not be that far away. As my colleague, Robert Gottliebsen has noted today (The big, robust Australian, February 4) Kloppers said that in iron ore at least, China appears to have completed its destocking.
Citibank's head of Asia Pacific economic and market analysis, Huang Yiping, recently told Business Spectator (KGB Interrogation, January 23) that Citibank's relatively optimistic forecasts for China's growth prospects was partly predicated on its view that inventories of commodities were being slashed quite dramatically and that he expected the inventory adjustment to be completed during the first quarter of this year.
As Kloppers says, once the stockpiles have gone, pricing will be determined by the balance between supply and demand – a market-clearing price will emerge – and the true level of demand will become clearer. Iron ore prices, in the spot market at least, have been rebounding.
Whether or not some level of stability emerges in commodity prices, and whether or not prices and volumes improve, BHP emerges as a winner because of the quality of its balance sheet and the strength and diversity of its cash flows.
The more distress there is the sector the greater the distance between it and the rest when the recovery comes. If it comes earlier, it is better placed to exploit it and to leverage its exposure to it than anyone else in the sector.
It's an enviable position to be in, but will place enormous responsibility on Kloppers to deploy his advantage in ways that maximises the competitive gains while minimising the risks of mistakes that could fritter it away.
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