THE DISTILLERY: Consumed by BHP

Before we get into the issue of the day, BHP Billion's big, big, mega big profit, another issue has emerged that will engage investors, if not our jotters. The credit ratings of our banks. Moody's sprung a shock late yesterday.
 
The Australian said today: "The Australian banking sector was stunned yesterday by news that ratings agency Moody's Investors Service had placed the big four banks on review for a possible downgrade and restated its negative outlook on them. "The review will focus on the Australian banking system's structural sensitivity to conditions in the wholesale funding market," Moody's senior vice-president Patrick Winsbury said. Moody's also has placed New Zealand's four major banks – all Australian-owned – on review for possible downgrade." And the Australian Financial Review reported that "Ratings agency Moody's Investors Service is considering lowering its ratings on Australia's four major banks – a move that could force up the cost of borrowing for banks and their customers".
 
This will no doubt prompt further comment, but for now, it's that hugest, most enormous, brobdingnagian profit of BHP that dominated our jotters this morning. Talk about being possessed. Where's a profit exorcist when you need one?
 
Fairfax's Liz Knight said this morning the BHP Billiton interim profit was so big that: "Using any measure, yesterday was one of the worst days for the federal Treasurer, Wayne Swan. The public does not expect a great deal of honesty from politicians, and the bar is set low in that regard. But to be so caught out on the fictional estimates of revenue the government said it should collect from its mining tax is humiliating. Over the next 10 years the difference between the amount of tax the industry would have paid under the old super tax regime and that which it will pay under the vastly watered down minerals resource rent tax is $60 billion. "
 
The Australian's Bryan Frith says "BHP could have been more generous. At balance date it had no net debt and was sitting on cash of $16.1 billion, and it continues to generate massive cashflow. There has been pressure on BHP to return cash to shareholders following its successive failures to achieve a major acquisition. First there was its abortive bid for Rio, followed by the shelving, after regulatory resistance, of the proposed Pilbara iron ore joint venture with Rio, and finally the rejection for political reasons by the minority Canadian government of a $US39 billion hostile takeover bid for Potash Corporation. BHP says it will continue to seek acquisitions, but its policy of restricting itself to large, long-life tier 1 assets limits the opportunities. Moreover, it's not prepared to buy if it considers the price too high. Chief executive Marius Kloppers says the gain in commodity prices has led owners of assets to expect "ambitious" prices." All that money, all that temptation.
 
Fairfax's Malcolm Maiden wrote this morning: "BHP also has a pristine balance sheet. There is some debt but there is also a huge amount of cash moving through, and the group ruled off the December half with a net positive cash position. Kloppers went out of his way to pour cold water on rumours that the company would soon stage another big takeover. The US oil and gas group Anadarko and British oil and gas group BG were rumoured targets, but Kloppers said the price tags on the top tier assets were daunting. The plan therefore is to focus on organic expansion. That's what the $US80 billion is earmarked for."
 
And the Australian Financial Review's Chanticleer said this morning: "There is glaring paradox in BHP Billiton's $US14.5 billion half year profit report that serves to down play the critical role played by chief executive Marius Kloppers in transforming the economics of the global resources sector." And the AFR also said that "BHP Billiton's $US10 billion expanded buyback sounds good, but it is in fact only $US5.8 billion in new capital returned to shareholders, as the company was already running a $US4.2 billion buyback."
 
Only Terry McCrann, the News Ltd tabloider, had the wit to look back at BHP's recent history (with a bit of anger) with this commentary: "BHP's takeover of the South African Billiton Group 10 years ago has turned into the greatest destruction of shareholder value ever seen in Australia and among the worst in the world. So bad, that it makes its great rival Rio Tinto's disastrous purchase of the Canadian Alcan aluminium company look almost inspired in comparison. In very simple terms BHP gave away $100 billion of today's equity to buy assets that in the latest six months, in the middle of the greatest commodities boom the world has ever seen, generated almost zero earnings. Indeed, if they generated positive earnings at all." A good point.
 
The Australian's John Durie said yesterday: "BHP Billiton's effective tax rate fell from 30.2 to 24.4 per cent in the last half, despite a 74.4 per cent increase in earnings, thanks to the appreciation of the Australian dollar which increased deductions. The company noted the figures included in its half-year report do not include all royalties and are global figures, but no matter how you spin it, it's hard to argue Australian taxpayers are getting a fair cut of the action from BHP's good fortune. The company noted some 57 per cent of its $US14.8 billion in earnings before interest and tax came from price increases alone and $US4.3 billion, or 30 per cent, from iron ore prices alone. In other words, over half the profit gain was a windfall. None of which could describe our political masters when you consider Kevin Rudd's debacle last year, compounded by Julia Gillard's stupidity in bowing to the big miner's demands. But more to the point, where was Australia's self proclaimed best treasurer Peter Costello when BHP was talking up the mining boom?" This morning Durie had another bite: "Treasurer Wayne Swan missed the point when he pointed to BHP's record profit as justifying his planned resources tax; it's Canberra's failing which is the issue. No one planned for the windfalls on offer. A stunning 57 per cent of the earnings increase was due to price increases, without the company having to raise a finger. But the China story is not exactly news, and Canberra's efforts have been dismal."
 
And The Australian's Tim Boreham also asked: "Could a baboon run adeptly BHP Billiton, as union head honcho Paul Howes has alleged of BHP's arch-rival Rio Tinto? We don't mean to diss BHP chief monkey Marius Kloppers or Rio counterpart Tom Albanese –- our simian relatives are an intelligent species – but Howes may have a point when you consider the composition of both companies' eye-watering profits. BHP today earned a Guinness Book of Records entry with a $US10.7 billion "attributable'' profit – and that's only for the half year. Of the $US14.8 billion earnings before interest and tax number, up 60 per cent, $US8.5 billion was due to improved commodity prices, especially iron ore. A $US1 a tonne movement in the iron ore price adds or subtracts $US85 million from BHP's net profit." Could a chimp run the AWU? Oh, silly question.
 
Fairfax's Malcolm Maiden said yesterday that "The key for BHP investors, though, is how long these golden days for BHP will continue, and the word from chief executive Marius Kloppers is that it can, at least in the medium term. Kloppers says that the miners have been overestimating the supply side response for a decade now. But as less production is added than expected, it is commodity prices that have been adjusting – by rising. That's simple supply-demand economics, and it will continue for some time. Kloppers says that for one thing, in the medium term, around two years, there simply are not that many top tier major mines coming onstream, because many miners cancelled or deferred mine development plans during the global financial crisis." A good point.
 
Fairfax's Ian Verrender says: "BHP Billiton yesterday was very, very good. But if you strip out the big banks and the major resource groups, which in the past few weeks have delivered previously unimagined riches to their owners, the latest round of earnings results overwhelmingly has been an ongoing saga of disappointment. The poor results, combined with earnings downgrades for the remainder of the year, are spread across a diverse array of industrial and service sectors and companies within those sectors. Given the strength of the Australian dollar, any company repatriating foreign currency has suffered a hit to revenue and to the bottom line. Add in a sustained shift to thrift from consumers both local and international and you have a recipe for hard times in any sector exposed to retail or discretionary spending."
 
Business Spectator's Stephen Bartholmeusz wrote yesterday: "While it might appear odd to say that a company that has just expanded its capital management program by $5.8 billion, increased its dividends and announced plans to spend more than $US80 billion expanding production is keeping its powder dry, that is a conclusion one could draw from the remarkable result BHP Billiton produced today. BHP Billiton produced a record $US14.5 billion profit, up 59.2 per cent, with record margins (an underlying overall earnings before interest and tax margin of 46 per cent), a record on capital of 48 per cent and near-record net operating cash flow of $US12.2 billion. The most striking aspect of BHP Billiton's result is that, as a consequence of those surging cash flows, and despite reinvesting more than $US5.6 billion in its business during the half, BHP Billiton is now sitting on $US16.1 billion of cash. Its balance sheet contains no net debt – it has about $US200 million of net cash. Marius Kloppers talked down the prospect of another attempt at a major acquisition by saying that there were very few targets that met BHP Billiton's tier one criteria and that the owners of those few that did tended, in the current environment, to have an inflated view of what their assets were worth."
 
And finally, Michael Pascoe remains a sceptic about the NAB's no exit fees campaign: "Wayne Swan is becoming delusional if he believes his claim that the NAB 'breaking up' advertising is a result of his pressure for more banking competition. Or perhaps he thinks he's also responsible for high commodity prices. Rather than bringing the banks to heel, Swan's effective endorsement of the NAB is perhaps the most cunning achievement of the campaign: Look, Mum, the Federal Treasurer and Deputy Prime Minister says NAB is taking on the other banks. It's not hard to imagine NAB's advertising team congratulating itself. Thanks for coming, Wayne. From the 'accidental' Tweet that kicked it off through the big ad spend, the videos and stunts outside the opposition's buildings, it picked up plenty of free coverage and commentary. (And continues to do so, as your reading this demonstrates.)." A Treasurer delusional, Well I never, where is Peter Costello when you want a good economist.