By Rhiannon Hoyle
BHP Billiton Ltd.'s diversification across commodities from
aluminum to oil earned it darling status in an industry where many
of its rivals were shackled to the fortunes of a single commodity.
This week, though, investors expect CEO Andrew Mackenzie to shed
more light on his proposal to tack away from that strategy as BHP
completes plans for one of the largest spinoffs in mining
history.
The release of BHP's fiscal first-half earnings after the U.S.
market closes on Monday will also highlight the challenges facing
the Anglo-Australian miner as it carves off better-performing
assets such as nickel pits to focus on four commodities including
iron ore and oil, the prices of which halved in value last
year.
As the slide in some resources markets deepens, investors and
analysts have questioned whether the timing is right any longer for
a roughly $15 billion demerger that would leave BHP with four
units, all of which are forecast to report an on-year decline in
first-half earnings.
The miner had long championed the benefits of digging up a
variety of commodities, as they often don't rise and fall in
tandem. "The diversification of our portfolio of commodities,
geographies and currencies is a key strategy for reducing
volatility," the miner repeated in recent annual reports.
Now, BHP will have to defend its rationale for a planned
demerger that will leave it with fewer commodities, lower cash
flow, and likely higher net debt, according to J.P. Morgan analyst
Lyndon Fagan.
The half year through December was already a challenging one.
While BHP produced more iron ore, coal and petroleum, prices of
those commodities tumbled.
Demand has been outpaced by a supply surge from mines planned
when prices were booming. New production has come at a time when
China's economy is slowing and concerns about global growth are
rattling confidence.
J.P. Morgan forecasts first-half earnings from iron ore before
interest and taxes have fallen 41% from a year earlier. It projects
a 16% drop in copper earnings and an 11% drop in earnings from its
petroleum and potash division over the same period. In coal, the
so-called fourth pillar of what will be the new BHP, the bank tips
a swing to a loss.
In contrast, J.P. Morgan estimates earnings from aluminum,
manganese and nickel--the rump of the intended spinoff--rose 72%
on-year.
The miner, based in Melbourne, Australia, is expected to report
a shriveled half-year net profit of $3.59 billion. That is the
median consensus of six analysts' forecasts and compares to a $8.11
billion profit a year earlier.
In addition to lower prices, the result will be weighed by
impairment charges. BHP last month flagged write-downs of up to
$250 million on its petroleum business and as much as $350 million
more after failing to sell its Australian nickel assets.
As BHP faces continued headwinds, many brokers have shifted
their preference to rival Anglo-Australian miner Rio Tinto PLC.
That company has wooed investors with a beefed-up dividend and
recently announced a $2 billion share buyback. Few analysts expect
BHP to start buying its own shares because of its uncertain
outlook.
To be sure, Rio Tinto has been accused of an overreliance on
iron ore. But it is the world's most profitable major producer of
the steelmaking ingredient, and it has signaled a shift to a more
broadly diversified miner with planned investments in everything
from bauxite to copper. Rio Tinto also has an aluminum business
that is starting to become more profitable after several troubled
years featuring billions of dollars in write-downs.
BHP's Australian shares have pulled 10% lower since mid-2014.
Over the same time, Rio Tinto's have gained 7.5%.
It is a change of pace from previous years. In the five years
through 2010, BHP's shares gained 99% compared with Rio Tinto's
57%.
BHP's Mr. Mackenzie has previously argued the demerger will be
the catalyst for better investor returns, saying the spinoff will
help it simplify the business and cut costs. Commodities are also a
cyclical business and the units it keeps are likely to benefit from
an upswing at some point.
It intends to release all shareholder documentation next month
and have the demerger completed before the end of June.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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