BHP Billiton reaches earnings nadir

August 16, 2016

(The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.)

BHP Billiton can finally see a ray of light at the end of the tunnel. Write-downs and two years of weak commodity prices have culminated in a record $6.4 billion full-year net loss, but the worst may now have passed for the Anglo-Australian mining giant.

Granted, much depends on Chief Executive Andrew Mackenzie being right when he predicts that a “free fall” in commodity prices is now over. Despite a rebound in demand for key commodities since the beginning of the year, revenue based on realised prices was still down 31 percent to $30.1 billion for the full year ending June 30. And while it has now completely written-off the value of its investment in the Samarco iron ore joint venture in Brazil after a dam burst earlier this year, it may have to increase the related $1.2 billion provision.

But the miner is leaving as little to chance as possible. After spending the beginning of the decade splurging on mine expansions, or pricey acquisitions such as its $12.1 billion takeover of U.S. gas producer Petrohawk in 2011, BHP is now a tighter ship. Capital expenditure fell 42 percent to $6.9 billion and is set to drop further through to 2018. And a ruthless efficiency drive has made the company one of the lowest-cost producers of coal and iron ore, making it a little less sensitive to swings in Chinese demand for these raw materials.

If BHP can keep its promise to cut costs further and boost output over the next year, shareholders could be in line for more cash after seeing dividends slashed by three-quarters. The miner expects operating free cashflow to double to $7 billion next year, as long as commodity prices don’t slump anew. While the price of raw materials is out of BHP’s hands, it’s done everything else to give shareholders some reason for optimism.

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