core sector communique

RESULTS FOR THE HALF-YEAR ENDED 31 DECEMBER 2009

Commentary on the Group Results

BHP Billiton delivered a sound financial result, despite significant volatility and continued uncertainty in the global economy. Strong sales volume growth on the back of demand recovery, particularly in the steelmaking raw materials (Iron Ore, Metallurgical Coal and Manganese) and good cost control across the business helped to partially offset the negative impacts of lower prices and stronger producers’ currencies.

Commodity prices recovered during the December 2009 half-year, however realised prices for most of our products were lower than the prices achieved during the December 2008 half-year. The strength of operating currencies against a weak US dollar also negatively impacted costs. In comparison to the prior period, Underlying EBIT and attributable profit excluding exceptional items decreased by 28.5 per cent and 7.0 per cent respectively, mainly due to these two factors. However, Underlying EBIT margin remained at a healthy 37.9 per cent and Underlying return on capital was 24.0 per cent, despite new not yet productive capital from continued investment.

Attributable profit increased by 134.4 per cent to US$6.1 billion due to the reversal of impairment charge for Ravensthorpe as well as a number of exceptional items reported in the prior period. Exceptional items reported in the prior period include costs associated with portfolio rationalisation, impairment of assets and increased rehabilitation provisions for Newcastle steelworks (Australia). We undertook further portfolio rationalisation during the period, with the announced sales of both the Ravensthorpe and Yabulu nickel operations (both Australia) and the divestment of Suriname alumina operations. The restructuring of the nickel portfolio is now complete, leaving us with a stronger and simpler nickel business.

The ongoing investment program continued to deliver volume growth, which contributed to half-year production records in Iron Ore and Petroleum. We delivered first production in three major projects during the period (iron ore, alumina and energy coal) and announced the approval of the Hunter Valley Energy Coal (Australia) MAC20 project. Subsequent to the period end we also announced the approval of US$2.2 billion pre-commitment capital expenditure for projects in iron ore, metallurgical coal and potash and the approval of the Antamina expansion in Peru. On 5 December 2009, BHP Billiton and Rio Tinto announced they had concluded definitive agreements to establish the Western Australia Iron Ore Production Joint Venture. These agreements are another milestone in delivering significant additional value to both sets of shareholders and our joint venture partners in the Pilbara.

Current period net operating cash flow was impacted by increased working capital on the back of recovering demand and prices, and together with the large capital expenditure program, resulted in net gearing climbing slightly to 15.1 per cent. Our strong balance sheet continues to give us significant flexibility to progressively grow production capacity, return to shareholders and opportunistically consider acquisitions.

Outlook

Economic Outlook

Global economic conditions have improved over the past six months as the United States and Europe lifted industrial output from previously depressed levels and China returned to double digit growth. Government stimulus measures appear to have supported the restocking activities in the developed economies and a gradual return to normalised global trade. For example, inventory movements accounted for 3.4 per cent of the 5.7 perxcent US real GDP annualised growth rate in the December 2009 quarter. In China, fixed asset investment continues to be a driving force behind the recovery. India has proven resilient, with industrial production surgingtowards the end of calendar year 2009.

Despite this positive momentum, we remain cautious about the speed and strength of the global economic recovery across the developed world. It appears that stimulus measures that supported the recovery have not fully addressed structural issues such as weak labour markets and excess production capacity in developed economies. A further variable will be the impact of any measures to control loan growth in China. It is evident that in the short term, the Chinese Government will focus on containing asset inflation. 

Notwithstanding our caution in the short term, over the long term we continue to expect emerging economies’ growth to strongly outperform the developed economies as they follow a path of continued urbanisation and industrialisation.

Commodities Outlook

During the December 2009 half-year there was a strong price recovery from a low base across the commodity suite. This was mainly driven by rapid economic recovery in China and restocking across the developed economies. Commodity prices were also supported by a weak US dollar relative to currencies of resource producing countries.

Physical demand for bulk commodities continues to be very strong in most regions following the aggressive destocking during the economic downturn. However real end demand for metals still appears sporadic. Commodity markets will continue to be largely dependent on Chinese and Indian demand. In the short term, it is critical to monitor the pace of monetary tightening and the rate of loan growth for commodity intensive sectors in China. We do not expect China to stop lending, however, reduced credit liquidity in key segments of the commodity market may have a flow-on impact on prices. Real commodity demand in the developed economies remains restrained and the impact of the gradual withdrawal of government stimulus will be a key driver.

In the long term we continue to expect strong growth in demand for our commodities. Any effects on commodity demand due to potential weakness in developed countries are likely to be offset over time by continuing growth as China and India urbanise and industrialise. However, with reduced capital investment in new mining capacity since 2007, supply may struggle to keep pace with demand in the medium and longer term. 

Growth Projects

During the period, we completed three major growth projects (aluminium, iron ore and energy coal) and approved one major growth project (energy coal). Subsequent to the period end we announced the approval of US$2.7 billion of capital investments, including one project (base metals) in execution and pre-approval capital expenditure for a further four projects (iron ore, two in metallurgical coal and potash).