BHP Billiton shares return to key levels after earnings beat forecasts

Updated 1318 GMT

Anglo-Australian mining giant BHP Billiton is the second iron ore-focused resources firm in a fortnight to report ‘success’ in crushing rivals by flooding the market whilst doing serious damage to its own profits.

As we saw with Rio Tinto’s full-year results mining sector priorities currently don’t call for profit growth.

It’s all about costs—pulling out as much of them from operations as is feasible, and pushing less efficient, costlier (usually smaller) players as far down the cost curve as possible, and eventually, out of business.

Shares of the biggest miner in the world in terms of production volumes were pushing 5% higher by Tuesday afternoon.

Result?

A 31% profit fall is a ‘beat’ nowadays

In keeping with the new normal, the third-largest iron ore producer in the world said underlying attributable profits for its half year to December were 31% lower year-on-year at $5.35bn.

But because analysts had forecast profit of $5.1bn, the outcome qualified as a ‘beat’ in the market’s view, and the shares rose more than 4%.

Part of that ‘success’ was managing to achieve better-than-expected results in iron ore, BHP’s biggest earner.

Finally, production and price performances in aluminium, manganese and nickel operations, which BHP plans to spin-out into a new company called South32, were all above forecasts.

Dividend hiked? Production upped? Costs cut? Tick, tick tick

BHP ticked the other box that’s fallen under closer scrutiny among resources investors during the broad-based commodity price slump of the last year or so—it raised its interim dividend 5% to $0.62 per share, again above market forecasts.

On the cost front, the company cut costs by $1.75bn and achieved additional output worth $500m in the first-half from improved productivity.

Total productivity gains roughly over the last three years are now $10bn.

BHP said it targeted capital expenditure for this year of $12.6bn, that’s an 11% cut compared to guidance given in November.

It also cut planned capital spending for 2016 financial year even further to $10.8bn.

None of these relative wins of course disguise the less palatable reality of business during the six-month period—that prices of all of BHP’s main products continued to collapse.

And whilst it portrayed plans for further cost reductions as a virtue, in fact these are at least partly necessitated by the precarious demand outlook.

The company again cut capital spending targets and said it would reap savings of $4bn in the three years to 2017, enabling it to continue to maintain dividends.

Shareholder pay-outs a new battleground for Big Mining

That brings us to a major differentiator that BHP investors will keep an eye on.

It was highlighted by the part-Australian miner’s inability to make an additional shareholder pay-out like its rival Rio Tinto, which announced a $2bn buyback with its recent full-year results.

BHP doesn’t have the latitude for such bonus payments partly because it’s crimped by an additional hit to revenues from exposure to crude oil, amid a 50% fall in oil prices since June.

This throws into sharp relief the essentially unsustainable nature of the survival strategy adopted by Big Mining.

It’s one that leaves the miners with diminishing margin for error in view of both upside demand risks (albeit those ones still seem far off) and the reverse—that the pricing crisis could yet deepen.

Indeed BHP’s CEO said on Tuesday that he didn’t expect prices of the miner’s key commodity, iron ore, to recover anytime soon.

“In the next 12 month there is quite a lot more supply addition than there is likely to be growth in demand,” CEO Andrew Mackenzie said in a call with analysts.

“If anything, prices are more likely to go downwards.”

Amid these continuing pressure, the first among BHP, Rio, Glencore and others, to moderately miss consensus earnings forecasts or to increase dividends at a weaker rate than expected, will face a measure of market punishment.

For the moment, BHP, which appears to be the biggest producer of minerals in the world in volume terms currently, is still edging its rivals in terms of expected consensus dividend.

Miners’ dividend yields, consensus forecast yields

_{LFY – last fiscal year; NTM – next 12 months; source: Thomson Reuters}

But BHP’s unwillingness to go down the route of reinforcing shareholder loyalty by shelling out extra wads of cash, a la rival Rio, leaves it vulnerable.

As it stands, its investors expect only moderate effective yield growth in the next 12 months, as can be seen in the table above.

But further bonus pay-outs of the kind Rio did, even if lower than the recent one, could eventually positition it close to its rival on total yield.

Resistance, take two

Investors may already have signalled their awareness of this risk, judging by the circa-20% loss of BHP shares over the last 6 months before Monday’s close, compared to a 7% fall by Rio.

Still, BHP stock bounced at the end of 2014, as did those of most of its peers, largely responding to progress in reducing costs and a slight uptick in metals prices.

For BHP, its upswing started a little beyond a support region established by another recovery, one from its collapse in 2008.

Upcoming challenges to the stock’s comeback can be seen in its failure as recently as last week to overcome support-turned-resistance from last autumn, ahead of major moving averages

Shorter-term traders can expect last week’s high to present a repeated upside risk, as shown on the 30-minute chart of BHP Billiton Daily Funded Trade.

Especially given that momentum is definitively stretched now.