Weak Metals Send BHP's Profits Down 35%


LONDON -- Anglo-Australian mining giant BHP Billiton (ISE: BLT.L) (NYS: BBL) wasn't able to resist the impact of plummeting metal and coal prices and reported a modest 0.7% rise in sales, despite record production at 10 of its mines.

This shouldn't come as too much of a surprise as aluminum prices have dropped nearly 30% in the past year and copper prices are down over 20%. Reduced demand from China had iron ore prices at three-year lows recently. Coal prices have been pummeled by oversupply as low natural gas prices in the U.S. have dramatically reduced the country's demand for coal.

Diversity is usually good
In theory, BHP's diversification across resources and geographies helps protect it from the volatility inherent in commodity prices or country-specific issues. For a counterexample, investors can look to troubled platinum miner Lonmin. However, when the prices of nearly all things pulled from the ground are plummeting (save oil) there's only so much protection diversity can offer.

As a result, BHP's earnings before interest, tax, depreciation and amortization (EBITDA) -- a measure of operating profitability -- dropped 9% and attributable profit (the profits shareholders get to lay claim to) dropped 35%.

Tightening the purse strings
Partially contributing to the drop in profits was a $346 million write-off taken on the planned expansion of the company's Olympic Dam copper mine in Australia. With metal prices as low as they are and demand from China slowing, BHP's decision to delay this major project appears to be a good decision. Mining is a capital-intensive business, and wisely allocating your cash to the most profitable ventures is what sets a good company apart.

Rival Rio Tinto also recently announced a more measured approach to expansion and new projects, so it appears the industry is taking the current pricing environment seriously, but that doesn't mean investment stops completely. BHP is planning to spend $22.8 billion on 20 projects next year and Rio Tinto has $16 billion planned for this fiscal year.

At the same time, both BHP and Rio Tinto are looking to dispose of mines and businesses that aren't considered low-cost enough or material enough to the overall business.

A slowing cycle
Seeing companies rationalize their spending and prioritize operations is usually a sign that an industry is moving into a slower stage of the business cycle. With fears of China's economic growth it seems that miners are facing a future with slower demand growth, so the moves by BHP and Rio Tinto would seem to make sense.

Despite fears of slower growth in the future, the resources BHP pulls out of the ground are going to continue to be in demand as developing countries urbanize and modernize their economies. As a well-diversified, low-cost operator, BHP is well-positioned to benefit for years to come. Investors lacking commodity exposure in their portfolios could do worse than considering adding shares of BHP as the excitement around the mining industry cools.

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The article Weak Metals Send BHP's Profits Down 35% originally appeared on Fool.com.

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