BHP Billiton reported a mixed first quarter with records for petroleum and iron ore offset by lacklustre base metals performances. Overall, this was a bit below expectations, and disappointment heightened in juxtaposition with Rio Tinto's unexpected outperformance. In reality both companies turned in similar September quarters, it's just that BHP has set a comparatively higher bar for itself. Although not a screamer, the quarter falls within the normal spectrum of ups and downs that can be expected in mining.
Noteworthy was the petroleum division, up 10% to a mammoth 41.2 million barrels of oil equivalent in production and well ahead of expectations. In particular, the liquids fraction--crude, condensate, and natural gas liquids (NGLs)--rose 17% to 22 million barrels largely courtesy of Shenzi and Atlantis in the Gulf of Mexico. An absence of weather-related interruptions generally aided the cause. BHP says the petroleum segment is on track to deliver 10% compound annual growth in fiscal year 2010.
Iron ore also put in a strong showing though only to anticipated levels. Output increased 15% to 30.8 million metric tons despite the impact of tie-in activities around the Rapid Growth (RGP) 4 project in the Pilbara. RGP4 is nearing completion, and RGP5's 50 million metric tons-per-year capacity add-on is 18% finished, on schedule, and within budget. All three pellet plants at Samarco in Brazil operated in the first quarter. This helped defray RGP4-related production weakness.
BHP expressed cautious market optimism. It said, "China's restock of commodities is essentially complete, and there is now evidence of higher-than-normal stockpiles across the supply chain." But there are now potential offsets from the developed economies with positive signs emerging. BHP said it is starting to see some impact of restocking. However it cautioned that as yet "there is little evidence of sustainable demand for metals" and that "real demand follow-through in developed economies may not be transparent until mid-2010."
Although first-quarter base metal volumes weigh on our earnings forecasts, recent upgrades to near-term iron ore and copper price expectations more than offset any negative impact. Therefore, we increase our earnings forecasts, despite the accident at Olympic Dam, which is likely to wipe around 2% off fiscal year 2010 earnings, based on our assessment. The haulage system in the Clark Shaft was damaged October 6, and mine output will be at 25% of capacity until full production resumes in the third quarter of 2010. Regardless, our BHP valuation is steady--near-term commodity upgrades, a rampaging petroleum division, and the roll forward in our cash-flow model offset weaker base metals and US dollar weakness.
Copper, nickel, and aluminium disappointed in the first quarter. Copper volumes fell 17% to 256,000 metric tons with maintenance at Escondida and Olympic Dam being the key culprits. Escondida work is finished, but Olympic Dam's issues will take longer to resolve.
