BHP Billiton Profit May Rise to Record on Copper, Iron Ore

BHP Billiton Ltd., the world’s biggest mining company, will probably say fiscal first-half profit climbed to a record on surging commodity prices.

Net income probably rose to $6.3 billion for the six months ended Dec. 31 from $4.4 billion a year earlier, according to the median estimate of six analysts surveyed by Bloomberg News. Melbourne-based BHP, which reports tomorrow, may also announce a $3 billion stock buyback, the analysts said.

Record commodity prices last year, driven by China’s 10.7 percent economic growth, allowed Chief Executive Officer Charles “Chip” Goodyear to return $5 billion to shareholders and plan to spend $7.5 billion on growth this year. Shares of Rio Tinto Group, the third-largest mining company, fell last week after investors said a 30 percent increase in dividend was too small.

“BHP earnings will be price driven,” said Atul Lele, who helps manage the equivalent of $322 million at White Funds Management in Sydney. “They are well-positioned to pay out a large amount of capital, and there is certainly scope for a dividend increase.”

Shares of BHP Billiton, listed in Australia and London, are little changed during the past 12 months in Sydney, underperforming the 17 percent gain on the Australian benchmark S&P/ASX 200 Index, on concern commodities prices will decline. The shares closed at a record A$32 ($24.82) on May 11, when copper prices peaked in London.

“The market is saying we can see the situation where prices will come off, and you’re investing in all this capacity,” said Peter Arden, an analyst at Intersuisse Ltd., in Melbourne. “Please give us more returns now.”

BHP posted a record $6.1 billion profit for the six months ended June, its sixth straight record.

Copper, Iron

BHP, the world’s largest producer of coal for the steel industry and third-biggest iron ore exporter, mines those products and more in Australia and controls Chile’s Escondida copper mine, the world’s largest. It also produces oil and gas.

The company’s base metals unit, which includes copper, will likely contribute 31 percent of the group’s pretax profit, making it the largest earner, according to UBS AG. Its carbon materials unit, which sells iron ore, coking coal and manganese, will probably be the second-largest contributor, accounting for 26 percent, the bank said.

Cash prices for copper, used in pipes and wires, surged in 2006, averaging $7,386 a metric ton on the London Metal Exchange in the six months to December, 84 percent higher than a year ago.

BHP also benefited from a 19 percent gain in iron ore prices last year. Production of the steelmaking raw material rose to a record in the second quarter. It was also helped by record prices for nickel, used to make stainless steel.

Prices, Costs

Prices of copper have fallen 16 percent this year, sparked by concern over rising supplies. An almost monthlong strike at Escondida and other Chilean copper mines helped curb production last year.

“The big issue for investors is where prices will be,” said Peter Chilton, who helps manage the equivalent of $800 million at Constellation Capital Management in Sydney. “Most of the forecasts have metal prices coming down. On that basis it could be hard to put forth an argument that it is a compelling investment, though people take the view it’s a good company and China’s economy is still doing well.”

Full-year profit at BHP is expected to rise 24 percent to $12.98 billion, according to the median estimate of 11 analysts surveyed by Bloomberg.

Expansion Projects

BHP is also struggling with rising costs at its expansion projects as it competes for labor, equipment and raw materials. Its 36 percent share of the Alumar alumina refinery expansion increased to $725 million from $518 million, BHP said Jan. 25.

The Atlantis South oil project in the Gulf of Mexico will cost about 50 percent more, with BHP’s share rising to $1.5 billion, from $1 billion. In November, BHP raised the cost of its Ravensthorpe nickel project in Australia 64 percent to $2.2 billion.

“The costs issue is endemic in the resources space,” said Neil Boyd-Clark, who helps manage the equivalent of $3.5 billion at ABN Amro Asset Management in Sydney. “BHP is generating good cash flow, and the expected prices decline should be factored in already. BHP has been treated harshly.”

Source: www.bloomberg.com