Resources Full-year results disappoint
The decision to devote scarce funds towards developing Canada's Jansen potash mine was announced on Tuesday amid a weaker than expected set of full-year results from the multinational miner.
BHP reported $US11.8 billion worth of underlying earnings, well below the $US12.6 billion that a consensus of analysts were expecting.
The result was dramatically lower than both last year's $US17.1 billion in underlying earnings, and the monster $US23.6 billion underlying profit in the boom year of 2011.
Net profit came in at $US10.9 billion ($12.3 billion), down 29.5 per cent from the previous year.
BHP blamed the result on a "temporary increase in the group's effective tax rate", as well as financing charges related to some recently issued debt securities.
Despite failing to meet external expectations, BHP chief executive Andrew Mackenzie described the result as "strong" in the face of "challenging times".
Shareholders will take home a full-year dividend of $US1.16, which is US4¢ more than last year.
But the potash decision dominated the results, and will gradually increase BHP's exposure to the world's growing demand for food, given potash's role in the production of fertiliser.
BHP announced it would spend $US2.6 billion developing mine shafts at Jansen, with that money set to be sequenced over a number of years at an average spend of about $US800 million per year.
The decision to invest comes at a time when potash prices are expected to fall on the back of a cartel collapse in Europe, and also as BHP seeks to contain capital expenditure to a relatively modest $US16 billion in the 2014 financial year.
Mr Mackenzie said Jansen may yet be developed in partnership with another company as a way of pursuing "a development path that maximises returns for shareholders".
The project will be developed slowly, with Mr Mackenzie hinting that first production of potash from the expanded mine was not certain to come this decade.
"I don't want to give you a production date ... we want to retain complete flexibility to enter the market at a time in which we think is right to maximise returns to our shareholders," he said.
He said BHP had not even decided the specific design of the mine, let alone determined the start date for production.
"We believe in the next decade, 2020 onwards, that the world will require some new mines ... but getting that timing absolutely precise is, of course, very difficult."
Mr Mackenzie has previously said potash has the potential become the company's "fifth pillar" alongside iron ore, coal, petroleum and copper.
Some of BHP's big investors, including BlackRock fund manager Evy Hambro, have recently warned BHP that pushing ahead with spending on Jansen would be "misguided" in the current climate.
In keeping with that sentiment, BHP's London shares were about 3 per cent lower in early trading.
But in a result that investors are likely to welcome, BHP's cost-cutting drive has taken $US2.7 billion worth of costs out of the business, and Mr Mackenzie said there was "a lot more to come".
BHP said it had paid $US200 million worth of mining tax to the Australian government in the 2013 financial year, plus a $US140 million instalment for the recent June quarter.
Frequently Asked Questions about this Article…
BHP reported underlying earnings of US$11.8 billion, below analyst expectations of about US$12.6 billion and well down on last year’s US$17.1 billion. Net profit was US$10.9 billion (A$12.3 billion), a fall of 29.5% year‑on‑year.
BHP said the US$2.6 billion investment in mine shafts at the Jansen potash project will increase its exposure to growing global demand for food and fertiliser — potash plays a key role in fertiliser production — and could help make potash a long‑term ‘fifth pillar’ for the company alongside iron ore, coal, petroleum and copper.
BHP plans to sequence the US$2.6 billion spend over a number of years at an average pace of roughly US$800 million per year, rather than as a single large upfront cost, and it is managing overall capital expenditure with a target of about US$16 billion for the 2014 financial year.
BHP has said the project will be developed slowly; management has not set a firm production date and even hinted first production may not occur this decade. The company also said it may pursue a joint‑venture or partnership to maximise returns, keeping flexibility on timing and design.
The article notes near‑term headwinds: potash prices are expected to fall after a cartel collapse in Europe, and some large investors — including BlackRock fund manager Evy Hambro — warned that pressing ahead with heavy spending on Jansen might be misguided in the current climate. BHP’s London shares traded about 3% lower in early trading on the news.
BHP blamed the weaker result in part on a temporary increase in the group’s effective tax rate and on financing charges related to recently issued debt securities. Despite missing consensus expectations, CEO Andrew Mackenzie described the result as “strong” given challenging conditions.
BHP said its cost‑cutting program has removed about US$2.7 billion of costs from the business, with management indicating there is “a lot more to come.” The company also reported paying US$200 million of mining tax to the Australian government in the 2013 financial year plus a US$140 million instalment for the recent June quarter.
BHP confirmed a full‑year dividend of US$1.16 per share, which is 4 US cents higher than the previous year. While earnings declined, the dividend was increased modestly, reflecting management’s decision on returning cash to shareholders.
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