Market reaction to earnings of world s largest mining company

BHP’s earnings matter. Not only is it the world’s largest mining company as measured by revenue, but its share size means it is a key holding in many portfolios in the markets where it trades – Sydney, London and New York. Its market capitlisation near US$200bn (as measured by Thomson Reuters) makes it the largest index weight on the ASX200 index by a very large factor. The group is very well diversified across geographies and resource types – though the majority of earnings in recent years have come from the petroleum and iron ore divisions.

We flagged the importance of the BHP result last week. Market expectations were for an interim underlying earnings number of around US$5.8bn and BHP printed just below that with earnings of US$5.7bn. These numbers are adjusted for one-off non-recurring items. The dividend was in line with expectations at US57 cents per share. That probably means market consensus is unlikely to change for the full year – currently at around US$13.9bn or US$2.60 per share.

We raised the prospect of a higher BHP share price in late January but we said the earnings line needed to exceed expectations in order for consensus numbers to rise. With a set of numbers in line with expectations announced today, this scenario seems unlikely. Therefore, BHP when converting numbers back to Australian dollars at current spot rates is trading at around 14 times this year’s earnings. If the iron ore price continues to stay above US$150 per tonne and energy prices maintain their upward momentum, there will be scope for a big earnings boost in 2014. But the market is still cautious.

For now, it seems as though BHP’s shareprice is capped at around US$40 per share, a long way from the dire A$30 per share it touched mid-late last year. That is the price, now to the fundamentals.

The much anticipated CEO succession plan arrived a little quicker than expected with the announcement today that Andrew Mackenzie will succeed Marius Kloppers as BHP’s CEO. Mackenzie has a strong track record in the energy space where BHP can differentiate itself from other listed peers, like Rio Tinto for example. The move seems to be progressing well under the guardianship of Chairman Jac Nasser (formerly at Ford) who remains the key figurehead of the business. Given this announcement, BHP will continue to bunker down for the next few years as part of an intentionally conservative push to re-establish trust with large institutional shareholders who do not want to see large, bold and risky acquisitions in line of a still challenging global environment.

Shares were last trading around 1% lower in Sydney with half an hour of trade remaining. BHP’s 20, 50 and 200 day moving averages in A$ terms are A$37.83, A$37.16 and A$33.84 respectively.