BHP (BLT) reported a 68% increase in adjusted first-half fiscal 2011 net profit to a record $9.6 billion, marginally below our forecast. It has been 18 months since the miner last reported a similar result. This time iron ore and coking coal shone, offsetting a wallowing aluminium division and weak manganese. Oil and copper were also important. The significance of volumes pales in comparison to price. Key to the result being slightly softer than expected were higher operating costs for coking coal and aluminium--Queensland floods exacerbating the former--and weak manganese prices. Aluminium in particular is sensitive to higher fuel and energy prices and suffered. Better-than-expected performance from iron ore on cost, and copper and oil on price, was a partial offset.
BHP reported a 72% jump in headline profit to $10.5 billion including $314 million in costs associated with the unsuccessful PotashCorp takeover bid, a $1.1 billion gain predominantly due to an increase in the value of future tax depreciation on exchange rate movements and a $138 million gain on release of tax provisions. The company excludes only the PotashCorp costs and $138 million tax provisions from its $10.7 billion underlying earnings figure while we add the $1.1 billion tax gain to our exclusions list--only the PotashCorp costs are real.
BHP declared a $0.46 interim dividend, a 10% increase and just above our $0.45 target. Noteworthy is the expanded $10 billion capital management initiative to be completed by the end of 2011. The company will consider both on- and off-market purchases with a total of around 4% of issued capital at the current share price. And it apparently won't get in the way of $80 billion earmarked for major project development, including iron ore and metallurgical coal, during the next five years.
We can see an argument for shareholders being underwhelmed by the paltry 27% dividend payout. But that's the risk of any acquisition, including the buyback, occurring at the top of the cycle. But BHP has had the progressive dividend policy in place for a long time, and the company has delivered impressive total returns.
Short term, BHP is cautiously optimistic on the economic outlook. For the longer term, it expects a slower but more sustainable Chinese economic growth model to lead to a reduction in resource intensity per unit of GDP. This outlook supports our general thesis for a gradual decline in commodity prices to a level still well above longer-term historical averages--plenty for a company to make respectable returns. Our fiscal 2011 earnings forecast declines 2% to $23.6 billion. Fiscal 2012 is unchanged at $29.5 billion. Right now Rio Tinto's (RIO) more pronounced share price discount to valuation makes it the more attractive investment proposition.
Mark Taylor is a senior stock analyst with Morningstar Australasia.
