As expected, BHP Billiton (BLT) reported sharp declines in fiscal 2011 third-quarter volume for most commodity categories. Hardest hit was coking coal, down 34% to 6.2 million tonnes courtesy of persistent Queensland rainfall associated with La Nina weather patterns. Force majeure remains in place for the majority of Bowen Basin mines and will probably crimp metallurgical coal volume for the rest of 2011. Australian rain also affected iron ore volume, down 6% to 32.9 million tonnes, and nickel volume, down 20% to 34.6 kilotonnes. The rain effect was exacerbated by tie-in activities at Western Australian iron ore, maintenance at Nickel West, and a furnace replacement at the Cerro Matoso nickel mine in Colombia. Petroleum output fell 4% to 35.8 million barrels of oil equivalent because of northern Australian cyclones, though permitting delays in the Gulf of Mexico also were a factor.
Even beyond the reach of the Australian weather, the production gods weren't smiling. Copper output declined 11% to 270 kilotonnes, though in line with expectations--lower copper ore grades at Escondida in Chile were well flagged. Alumina production fell 12% to 882 kilotonnes because of a calciner outage at Worsley.
However, the two hardest-hit segments in terms of volume--carbon steel materials and copper--also enjoyed the strongest gains in price, and the commodity price action eclipsed the volume effects. CSM and copper are the largest contributors to revenue and profit. We estimate group third-quarter revenue at around $19 billion, or 37% above the year-ago quarter, despite volume being in line. CSM prices are 60% higher and copper prices 30% higher than a year ago.
Our valuation is little changed, though our fiscal 2011 earnings forecast softens on the weaker-than-expected third-quarter results and the impact of rain-affected coking coal assets off line into the fourth quarter. Our fiscal 2012 earnings forecast increases marginally thanks to some catch-up of lost fiscal 2011 volume and at higher prices. BHP recently bought back around 4% of its issued capital via a combination of off-market buyback of Limited stock and on-market buyback of PLC stock. The off-market buyback was tax effective, conducted at a 14% discount to market, and marginally accretive to fiscal 2012 earnings. Most important, it was conducted at a considerable discount to our valuation, offsetting some of the negative impact of the poor third quarter.
The buybacks are an investment of around $10 billion, but BHP's net cash position is still near $8 billion, in our estimate, improved from a neutral position at end December. Such is the prolific cash flow at current commodity prices. BHP remains a top resource pick at the right price. It is unleveraged and enjoying a rebound to 30%-plus returns on invested capital from none-too-shabby 20% levels in fiscal 2010. We forecast fiscal 2012 earnings before interest and tax margins approaching 50% versus the five-year average of 40%. BHP is enjoying historically high commodity prices, generating revenue from assets largely built at a "days of yore" cost. This is an extremely powerful combination--just ask anyone trying to build something today!
