There isn’t much to dislike in BHP Billiton’s [ASX:BHP] full year results. The tale of the tape shows 8 of its 10 business sectors increasing revenues – most with double digit percentage gains, and earnings (EBIT) increasing in five of the 10 sectors, with two of those sectors returning triple digit percentage gains. [http://www.independent.co.uk/news/business/news/chinas-demand-helps-bhp-to-record-profits-901902.html]
Iron ore revenues were up by 71% and EBIT up 70%. Petroleum revenues and EBIT increased by 62% and 82% respectively. While manganese revenues increased by 134% which was dwarfed by the increase in EBIT of 549%. Why such a big increase for manganese? We’ll take a look below.
Despite the good results and the fact that BHP beat consensus analysts’ estimates, the share price traded lower in early market activity, which isn’t a complete surprise seeing as the share price has had close to a 10% rally during the last week.
So, what are the major points to take away from these results? Not forgetting that annual results by their very nature are historical, at least half of the focus needs to be on the future outlook, and on that score the message from BHP appears to be positive.
According to the preliminary report BHP sees that “Looking to the longer term, demand for our commodities is expected to remain strong. We expect that higher long-run raw materials and energy prices and stronger producer currencies should place upward pressure on industry supply costs, and hence, prices of minerals commodities. We continue to expect that commodity prices will be driven by long-run marginal cost of supply.”
The report also suggests that the recent sudden fall in the price of some commodities has been overdone, stating that “supply side issues remain high. This has led to overestimation of the supply side response, and thus, price outcomes regularly being underestimated by industry observers.”
Magnificent Manganese
BHP’s manganese production totaled 775,000 tonnes for 2007/2008, a 5.9% increase on the previous year. Yet the earnings on manganese production returned an increase of USD$1.3 billion (549%) to USD$1.6 billion.
Needless to say, when you put two and two together it means that the price of manganese has risen during this period.
Manganese is an important input for iron and steel production. Importantly, there are no viable alternatives to the use of manganese in this way, which means that if you need to produce steel for construction (eg. China) then you also pretty much need manganese as one of the ingredients. Fortunately for BHP it is found most commonly in places such as South Africa and Australia, just where BHP happens to have its mines.
Babcock & Brown Battered Again
The news just goes from bad to worse at Babcock & Brown [ASX:BNB]. The company has already had to write off and sell off assets from funds including B&B Power [ASX:BBP].
It is continuing to suffer for the rapid expansion in its structured investments that it and Macquarie rolled off the investment banking production line over the last few years. It was inevitable that bankers would have little interest in the long term sustainability of a fund as they were more focused on bringing in as many deals as possible in order to collect big pay cheques.
B&B have had to suffer far more pain that Macquarie due to the fact that B&B are a less diversified organization. When structured products started to go smelly, Macquarie were able to refocus their attention elsewhere. For a company that modeled itself as a smaller version of Macquarie they are probably wishing that they copied the diversity of Macquarie as well.
Farewell Phil
We note with sadness that Telstra (lack of) Public Policy & Communications head Phil Burgess is to resign and return to the United States. We’re not sure whether he managed to achieve anything for Telstra [ASX:TLS] while he was here, except for managing to aggravate a lot of people in government and the telecommunications industry.
Cheers.
Kris Sayce