BHP May Report Record Second-Half Profit on Copper, Iron Prices

Wednesday, August 23rd 2006

BHP Billiton Ltd., the world’s biggest mining company, may say fiscal second-half profit jumped to a record because of rising copper and iron ore prices.

Net income probably increased to $6.34 billion for the six months ended June 30 from $3.45 billion a year earlier, according to the median estimate of five analysts surveyed by Bloomberg News. Melbourne-based BHP, scheduled to report tomorrow, may post the highest ever six-month earnings for an Australian company.

“Copper, coal and iron ore prices are at records or near records, and those are the driving forces behind BHP,” said Peter Chilton, who helps manage $800 million at Constellation Capital Management, including BHP stock, in Sydney. “This current year could be their peak.”

BHP Chief Executive Officer Charles “Chip” Goodyear plans to spend as much as $14.4 billion on mines and oil fields to meet rising demand from China, the world’s fastest-growing major economy. Shares of BHP have risen 25 percent this year on the Australian Stock Exchange, compared with the 6.3 percent gain on the benchmark S&P/ASX 200.

Its London-traded stock has risen 11 percent this year, compared with the 5.3 percent gain on the benchmark FT-SE 100 index.

China’s economy grew 11.3 percent in the second quarter, the fastest pace in more than a decade, as the nation produced more cars and built more factories and homes. Buying from Chinese manufacturers and steelmakers accounted for 16.2 percent of BHP’s first-half sales.

Capital Returns

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

Workers at Escondida have been on strike for more than two weeks as they seek higher wages to share in BHP’s record profit. They rejected BHP’s latest offer on Aug. 20.

Full-year profit before one-time items, such as the sale of a stake in a copper mine in Peru, will probably rise 64 percent to $10.5 billion from $6.4 billion a year ago, according to the median estimate of nine analysts surveyed by Bloomberg. Full- year net income will likely rise to $10.7 billion, according to the survey.

Samantha Evans, a spokeswoman for BHP Billiton in Melbourne, declined to comment on the results. Goodyear’s pay rose 19 percent to $4.94 million for the year ended June 30, 2005.

Competitors such as Anglo American Plc are paying out more in dividends and buying back stock. Investors expect BHP tomorrow to add $3 billion to the $2 billion announced in share buyback and increased dividends in February, according to analysts surveyed.

`Pretty High’

“They’ve got a pretty high capital expenditure over the next 18 months to two years, so they’ll want to retain some flexibility,” said Tim Barker at BT Financial Group in Sydney, managing and advising on $54 billion including resources stocks. “But there will be a fair level of capital management that will be announced.”

Anglo American, the world’s second-largest mining company, said Aug. 4 that it will spend $5 billion buying back stock and paying dividends after posting a 60 percent first-half profit increase. Rio Tinto Group, the third biggest in the industry, posted a 75 percent increase in first-half profit to a record $3.8 billion on Aug. 3.

BHP in its fiscal year had record production of aluminum, copper, iron ore, nickel and natural gas by investing in current fields and spending A$9.2 billion (US$7 billion) to buy WMC Resources Ltd.

Output Records

The higher output allowed BHP to take advantage of a 19 percent jump in prices of iron ore, a key steelmaking ingredient, that started in April. Prices of copper, used in wires and pipes, reached a record $8,800 a ton on the London Metal Exchange on May 11, while nickel, used to make steel rust-resistant, more than doubled this year.

“Copper prices are the cream on the top for them,” said Rob Clifford, an analyst at ABN Amro Holding NV in Melbourne.

BHP’s base metals business unit, which includes copper, will likely be the top earnings contributor, bringing in a third of profit, he said. The company’s carbon steel business, which includes iron ore, could bring in 30 percent of earnings before interest and taxes, as the second-largest earner.

BHP may give more details on the delays and budget increases at a $1.34 billion nickel project in Australia, and a $2.5 billion oil and gas field in the U.S. The company said in July that costs may be at least 30 percent more than earlier estimated because of labor and equipment shortages.

“The capital costs will be an area under scrutiny,” said ABN’s Clifford.

Source: bloomberg.com