BHP Earnings Rise Not What it Seems

BHP Billiton reported a better-than-expected 31% increase in first-half 2014 earnings, but excluding the deferred tax asset things look more steady

Mark Taylor 19 February, 2014 | 9:08AM
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BHP Billiton (BLT) reported a better-than-expected 31% increase in first-half 2014 earnings to $7.8 billion. However, excluding the $491 million gain on re-measurement of the deferred tax asset associated with the mineral resources rent tax, $7.3 billion is closer, though still ahead, of our pre-result forecast of $ 6.7 billion. The driver of outperformance was copper, with earnings before interest and tax doubling to $2.9 billion on higher pricing and lower unit costs, reflective of higher grades.

The petroleum division was another first-half 2014 outperformer, important given it's a low-cost, long-term growth driver that contributes to the company's narrow moat. Petroleum is a key back-up to the main narrow moat driver, low-cost Pilbara iron ore. It is pleasing to see iron ore's earnings before tax contribution fall from 56% to 52% of group total in first-half fiscal 2014, as copper and petroleum pick up more of the slack.

Despite hefty iron ore expansion programs, we expect iron ore to normalise to about 35% to 40% of earnings before interest and tax by 2016 as prices soften to our long-term $90 per tonne forecast, versus $125 currently, and as petroleum grows from 20% of earnings before tax now to about 30%, in line with U.S. shale volume expansion. This dynamic is in contrast to Rio Tinto (RIO) where iron ore represents more than 90% of second-half 2013 earnings before tax and is unlikely to fall much below 65%, even in the long term. That's fine while iron ore chugs along nicely, but there is danger in having all your eggs in one basket.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BHP Group PLC2,058.50 GBP0.00Rating
Rio Tinto PLC4,592.50 GBP0.00Rating

About Author

Mark Taylor  is an equity analyst at Morningstar.