How BHP Billiton Has Fared During 2012


LONDON -- BHP Billiton has gained about 9% to 2054.50 pence in 2012, making the share one of the year's steadier performers in the FTSE 100 (UKX). During the same time, the blue-chip index has gained 4%.

BHP Billiton, the world's biggest diversified miner, has fought hard this year against a backdrop of moderating growth in China and general weakness in Europe, as well as lower commodity prices threatening the firm's future growth.

In February, the company reported its half-year results for the final six months of 2011, and the numbers looked strong. Though profits slipped 6%, the company posted cash flow of $12.3 billion and operating profits of $15.7 billion (up 8%). The interim dividend, at 55c, was up 20%.

Then, in August, the company's year-end numbers were released and showed net operating cash flows of $24.4 billion, down some 19%, though BHP's return on capital was a healthy 23%. Underlying earnings, meanwhile, dropped 15% to $27.2 billion due to industrywide cost pressures and a weakness in some of the commodity markets where BHP operates.

BHP, which has not cut its dividend in 100 years, issued an 11% increase in the fiscal 2012 year-end payout.

Due to intensive capital spending, BHP saw its level of debt increase by 150% during 2012 pushing the company's debt to equity ratio to nearly 45%. With fears of further falls in commodity prices and rising debt, the management of the company has scaled back the pace of spending -- with some major projects being put on hold. Management is also selling non-core projects.

Things may not be going perfectly for BHP, but the company's diversification -- both geographically and across commodities -- has helped it weather the recent commodity markets better than its peers Rio Tinto -- which is more reliant on iron ore and aluminum for its business -- and Anglo American, which has had the double-whammy of its heavy exposure to the troubled South African mining market and iron ore.

BHP's management is focused on a strategy of improving margins and diversifying into a resources company, rather than operating as a pure miner. This strategy may be starting to benefit shareholders, who are no doubt looking to BHP to rationally grow production in a weak pricing environment, while at the same time cleaning up its balance sheet in order to support its 3.6% yield, which is above the average of 2.9% yield for the mining sector.

The company reckons much of the pain could be behind BHP now and expects more stable, though flat, macro-economic conditions going forward. That, and its successful commodity diversification strategy, appears to make the directors cautiously optimistic about the future and that should make investors cautiously optimistic too.

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