• A robust financial performance in the context of a rapid deterioration in market conditions.
• Underlying EBITDA up 25% to US$13.9 billion and Underlying EBIT up 24% to US$11.9 billion.
• Strong Underlying EBIT margin(1) of 46% despite significant pressures from lower prices and a
lagged effect of input costs benefit.
• Record net operating cash flow(2) of US$13.1 billion, up 74%, which is an excellent result given
market conditions and our strong growth pipeline.
• Attributable profit up 2% to US$6.1 billion and EPS up 3% to 110.1 US cents (both measures
excluding exceptional items).
• Strong balance sheet with net debt decreased by 51% to US$4.2 billion. Gearing of 9.5% and
Underlying EBITDA interest cover of 86.6 times.
• Interim dividend of 41.0 US cents per share, an increase of 41% on last year’s interim dividend.
• A disciplined and value-accretive commitment to invest through the cycle, with one iron ore and three oil and gas projects sanctioned during the half-year.
Commentary on the Group Results
The results released today represent a robust operating and financial performance achieved in an environment that deteriorated significantly during the period, particularly over the last quarter. Our results benefited from strong volume additions in Petroleum and Iron Ore, as the growth projects in these two CSGs continued to ramp up.
Underlying EBIT increased by 23.7 per cent over the corresponding period to US$11.9 billion, with a healthy Underlying EBIT margin of 45.6 per cent. We continue to focus on our cost performance and expect to see the benefits of falling input prices, albeit with some lag. The strength of the US dollar against our main operating currencies positively impacted the Underlying EBIT for the first half by US$1.5 billion.
Attributable profit and profit from operations fell 56.5 per cent and 23.8 per cent respectively, as a result of a number of exceptional items, the majority of which are non-cash. These items include the indefinite suspension of Ravensthorpe (Australia), costs relating to the Rio Tinto offers, impairment of assets and increased rehabilitation provisions for Newcastle steelworks (Australia).
Net operating cash flow was outstanding and increased by 73.9 per cent to US$13.1 billion. The strong cash flow performance has reduced our net debt to US$4.2 billion, with a net gearing of 9.5 per cent and Underlying EBITDA interest cover of 87 times. This strong balance sheet is a competitive advantage and leaves us resilient in these challenging times. It also means that we are well positioned to take full advantage of an eventual recovery in the market.
During the six months to December 2008, we have witnessed an unprecedented fall in commodity prices, with market prices falling in the order of 50 per cent during this period. As the global economy continues to deteriorate, we are witnessing further demand contraction for our products. We believe it is likely that uncertainty will extend into the medium term. As a consequence of the macro economic environment we have taken a number of actions consistent with our focus to maximise long term shareholder value. These actions include the decision not to proceed with the Rio Tinto offers, adjustments in production where physical demand decreased, suspending cash negative operations and deferrals of low priority capital expenditures.
Notwithstanding the current economic uncertainty, we continue to believe that the needs of the
developing world will drive long term demand for our products. Furthermore, the supply adjustments we are now witnessing could result in a constrained supply side when economic recovery does take place.
The financial and operating strength of the Group means that we are able to continue to take a long term view, not compromising long term value as a result of short term pressures.
Growth Projects
During the period we commissioned three oil and gas projects and, highlighting our commitment to long term growth, we approved a total of US$5.9 billion of growth expenditure in one iron ore and three oil and gas projects.
We are continuing to progress well against budget and schedule for those projects which have already been approved.
Outlook
Global Economic Outlook
In August 2008 we highlighted the short term global challenges that were evident. At that time, global economic activity was moderating, financial markets were volatile, and inflationary pressures were apparent. Since then, the global economy has deteriorated at an unprecedented rate taking most observers by surprise.
Economic growth has been impacted by a worldwide dislocation of financial markets that quickly moved into the real economy as credit markets froze and consumer and business confidence collapsed. Deflating asset values, particularly home values in the United States and parts of Europe continue to impact credit availability and confidence. The contraction that began in the United States has extended to impact growth rates in emerging economies as demand for their exports slows. We expect global economic growth to be weak over the short to medium term as developed economies such as the United States and Europe enter recession and the rate of growth of emerging economies like China slows. Like many governments around the world, the Chinese government has introduced wide ranging stimulus measures. However, it is likely that these measures will take some time to have a positive flow through to economic activity. In reaction to deteriorating financial and economic conditions, there is a risk of increasing protectionism by governments which may hamper any global recovery. Whilst the global economy faces significant challenges, our long term outlook remains unchanged. We expect emerging economies’ long term growth to be robust as they continue on the path to urbanisation
and industrialisation.
Commodities Outlook
Amid uncertainty surrounding the outlook for the global economy, weakness and volatility in the
commodity markets has prevailed during the first half of the 2009 financial year. During this period, spot prices for key commodities have fallen steeply in US dollar terms. However, weaker local currencies against the US dollar and the benefits of falling input prices, albeit with some lag, have partially offset the impact on margins.
The unprecedented deceleration in the global economy has sharply reduced demand for commodities. Producers in both developed and emerging economies have responded quickly by closing marginal sources of supply and deferring projects. In the short term, it is expected that many producers will primarily focus on cash conservation to cope with financial distress. We expect that commodity price weakness and volatility will persist.
However in the long term, we expect continued strong growth in demand for commodities from China and other emerging economies. We continue to expect that long-run commodity prices will be driven by their long-run marginal cost of supply. Reductions in current capital spending across the industry may constrain industry supply when demand growth recovers.
Petroleum
Underlying EBIT was US$2,675 million, an increase of US$707 million, or 35.9 per cent, compared to the corresponding period.
The increase in Underlying EBIT was mainly due to higher production. Strong growth in production was driven by the successful delivery of a series of growth projects and continued strong gas sales in Western Australia and Pakistan. Production was successfully commenced at Neptune, our first deepwater Gulf of Mexico operated project, and at the North West Shelf LNG Joint Venture’s Train 5 (Australia), which came online ahead of schedule. This strong growth was achieved despite the continuing impact of two hurricanes in the Gulf of Mexico.
Underlying EBIT was also positively impacted by higher average realised oil prices per barrel of
US$85.22 (compared with US$81.20), higher average realised natural gas prices of US$3.97 per
thousand standard cubic feet (compared with US$3.42) and higher average realised prices for liquefied natural gas of US$12.82 per thousand standard cubic feet (compared with US$7.79).
Gross exploration expenditure was US$263 million, a decrease of US$32 million from last half-year, mostly due to timing. During the December 2008 half-year, we acquired exploration rights to a significant acreage position onshore in the Llanos Basin in Colombia, offshore acreage in the Palawan Basin in the Philippines, and seven deepwater blocks offshore Western India. Evaluation work has commenced, or continues, on our numerous acreage acquisitions from previous years.
Aluminium
Underlying EBIT was US$289 million, a decrease of US$391 million or 57.5 per cent from the
corresponding period. Lower LME prices and premiums for aluminium, had an unfavourable impact.This was partially offset by the positive impact of price-linked costs. The average LME aluminium price decreased to US$2,304 per tonne (compared with US$2,494 per tonne). The average realised alumina prices were in line with the corresponding period.
Half-year production and sales were impacted as the Southern African smelters continued to operate at reduced levels to comply with the mandatory reduction in power consumption. The December 2008 half-year includes the complete shutdown of the B and C potlines at Bayside (South Africa). Higher operating costs also had an adverse impact. This was due to higher charges for energy, depreciation, maintenance, raw materials, and labour. Due to the significant deterioration in prices, inventory revaluation adjustments reduced Underlying EBIT by US$53 million. However, an intensive focus on cost containment through various business excellence initiatives and the benefit of a stronger US dollar reduced the full impact of cost increases.
Base Metals
Underlying EBIT was a loss of US$111 million, a decrease of US$3,478 million or 103.3 per cent from the corresponding period. This decrease was mainly due to a significant reduction in the prices for all commodities in Base Metals. Lower average realised prices decreased Underlying EBIT by US$2,905 million. This includes the impact of Escondida forward contracts losses. Since 2005 Escondida has executed forward contracts for the physical delivery of copper in order to achieve the average market prices over the relevant quotational periods. Due to the significant fluctuations in copper prices and unplanned interruptions at Escondida, this reduced Underlying EBIT by US$333 million for the period. Lower sales volumes due to declining grades and electrical motor reliability issues at the Laguna Seca SAG mill at Escondida reduced Underlying EBIT. This was partially offset by the continued ramp up of Spence and Escondida Sulphide Leach. Also impacting lower EBIT were higher costs in the period, mostly due to the impact of lower grades at Escondida and higher energy, fuel, acid and labour charges at all assets. The effect of inflation also impacted negatively. Higher costs were partially mitigated by a cost reduction program initiated during the December 2008 half-year in response to the rapid drop in prices and changing business environment. A stronger US dollar also contributed to mitigate the drop in commodity prices. Underlying EBIT was also impacted favourably by lower purchases of third party uranium from the spot market. Provisional pricing of outstanding copper shipments, including the impact of finalisations, resulted in the average realised price for the reporting period being US$1.71/lb versus an average LME price of US$2.63/lb. The average realised price was US$3.22/lb in the corresponding period last year. The negative impact of provisional pricing and finalisations for the period was US$1,297 million. Outstanding copper volumes, subject to the fair value measurement, amounted to 242,640 tonnes at 31 December
2008. These were re-valued at a weighted average price of US$3,063 per tonne.
Diamonds and Specialty Products
Underlying EBIT was US$79 million, in line with the corresponding period. Underlying EBIT was
positively impacted by a stronger US dollar and reduced exploration and business development costs.
Stainless Steel Materials
Underlying EBIT was a loss of US$752 million, a decrease of US$1,551 million compared with the
corresponding period. This was mainly due to lower average LME prices for nickel of US$6.76/lb
(compared to US$13.48/lb) reducing Underlying EBIT (net of price linked costs) by US$916 million. The positive impact of price-linked costs was US$127 million. The furnace rebuild at the Kalgoorlie Nickel Smelter and concurrent maintenance at the Kwinana Nickel Refinery (Australia) adversely impacted Underlying EBIT due to lower production and sales volumes
(US$234 million) and higher operating costs (US$104 million). Higher labour, depreciation and energy costs also had an adverse impact. This was in part offset by a favourable impact of the weaker Australian dollar against the US dollar. Underlying EBIT also decreased by US$101 million due to the continued ramp-up of operations at Ravensthorpe and the Yabulu Extension Project. Total Underlying EBIT for these operations for the half-year was a loss of US$233 million.
Iron Ore
Underlying EBIT of US$4,143 million increased significantly by US$2,470 million or 147.6 per cent. This was mainly driven by higher average realised prices which increased the Underlying EBIT by US$2,195 million. The negative impact of price-linked costs was US$152 million.
In Western Australia Iron Ore we have received some requests for deferrals from long term contract customers. However, sales volumes were a record despite a weak demand environment. This reflects our strong relationship with long term customers and our ability to sell into the spot market. As we have been able to sell the deferred long term iron ore tonnages into the spot market, production adjustments during the half-year were limited to Samarco only.
Higher operating costs had an adverse impact on Underlying EBIT. This was largely due to inflationary pressures in Australia, increased labour and contractor costs. Depreciation expense was higher due to the successful expansions at Western Australia Iron Ore and Samarco. This was in part offset by a favourable impact of the weaker Australian dollar and Brazilian real against the US dollar.
Manganese
Underlying EBIT was US$1,245 million, a significant increase of US$814 million or 188.9 per cent. This increase was due to higher sales prices achieved for alloy and ore and a favourable exchange rate impact. Manganese ore and alloy are entirely dependent on the steel industry and are therefore directly impacted by the current weak steel markets. As a result, lower sales volumes had a negative US$193 million impact on Underlying EBIT. Other operating costs were higher due to increased distribution costs, and higher ore development, coke and labour costs. A portion of the increase in costs was deliberately incurred to maximise production to meet the strong demand earlier in the December 2008 half year.
Metallurgical Coal
Underlying EBIT was US$3,123 million, an increase of US$2,600 million, or 497.1 per cent from the corresponding period. The increase in Underlying EBIT was mainly due to the higher realised prices for hard coking coal (198 per cent), weak coking coal (233 per cent) and thermal coal (61 per cent). This was offset by a negative impact on price-linked royalty costs. Higher royalty costs associated with the introduction of a two tier royalty structure in Queensland from 1 July 2008 reduced Underlying EBIT by US$82 million.
A stronger US dollar against the Australian dollar had a favourable impact of US$328 million. The cost impact attributable to the recovery from the rainfall events at Queensland Coal had an unfavourable impact of US$122 million in the period. Other operating costs were higher due to increased labour costs, longwall discontinuity at Appin Mine and extended changeout at Dendrobium (both Australia). Inflationary pressures also had an unfavourable impact on Underlying EBIT. In addition, in the corresponding period profit on the sales of Elouera mine (Australia) and Queensland coal mining leases were realised.
Energy Coal
Underlying EBIT was US$1,072 million, an increase of US$795 million, or 287.0 per cent from the corresponding period. The increase in Underlying EBIT was mainly due to the higher export prices, favourable exchange rate impact on costs and record production at Hunter Valley Coal (Australia) and Cerrejon Coal (Colombia). These gains were partially offset by higher costs due to inflationary pressures, and increased diesel, labour and contractor costs.
Group and Unallocated items
Underlying EBIT was positively impacted by a stronger US dollar against local currency costs and the revaluation of rehabilitation and closure provisions.
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