The world's largest miner, BHP Billiton Limited, is set to announce a record 20 billion Australian dollars (21.6 billion U.S. dollars) profit, Despite signaling an expected downturn, the mining powerhouse is on track to break all Australian records for an Australian annual corporate profit.
As the Anglo-Australian giant has reported annual production records, the miner is expected to report 20.5 billion Australian dollars (22.2 billion U.S. dollars) annual profit next month. If the miner can hit the mark, this would represent an almost 5 billion Australian dollars (5.4 billion U.S. dollars) or 25 percent increase on the previous Australian corporate annual profit also taken by BHP in 2008, according to some analysts.
BHP Billiton is well expected to see the double-digit earnings growth in both fiscal 2011 and 2012. Yet, thanks to a consistently conservative outlook, shares remain relatively cheap with a forward P/E of only 9.9.
After a year of devastating floods and storms that hammered BHP ' s key Queensland and Western Australian operations, the assumption from analysts was that despite high commodity prices, the major Australian miners would be down on key coal production totals for the financial year just ended.
In a leaked Merrill Lynch report, specialist analyst Peter O' Conner noted that there was some suspicion that BHP's surprisingly robust figures reflected a simple, deceptive strategy that has apparently paid off. O'Conner described it as "Under-promising versus over-delivery."
This has allowed BHP to forecast a conservative approach, making its announcements more than just record-breaking. "A conservative approach rather than (what Merrill Lynch) calls under-pricing, over-delivering, does put a lit somewhat on market expectations." Says David Lennox, a mining analyst at the international stock market research firm, Fat Prophets.
"The markets are reasonably aware what projects come on stream and are ramped up this year, but this effectively it puts a lid on the market it just gives that tempered feel rather than letting the market escalate. Not putting all your cards into the one year I guess you could say." BHP said in January that the inclement weather had crimped over half a billion Australian dollars worth of coal.
The world's largest miner emphasizes that nearly all its coal product is in Queensland, but in fact its Illawarra production can offset that downturn, as reflected in this latest report. "When combined with disruption to external infrastructure, we expect an ongoing impact on production, sales and unit costs for the remainder of the 2011 financial year," the company noted ominously in its second-quarter production report.
Yet BHP Billiton reported a rise in coal output for the three months ending 30 June.
Coal output jumped 19 percent from the previous three months but the miner says output remains 28 percent below levels for the same time last year again blaming cyclones and heavy rains that hit BHP's collieries in Queensland earlier in the year.
BHP's aggressive investment and takeover strategy rather than growing and evolving its own operations organically through the global financial crisis has certainly paid dividends.
Despite calculated downplaying of production and a well- reported rise in production costs, BHP has recorded record iron ore production coming our of Western Australia for the 11th consecutive year.
This is followed by surprisingly vigorous output almost across the board. BHP reports that it has set annual production records at 10 of its global operations, operations that include copper, petroleum, iron ore shale gas and manganese.
With major Australian miners, reporting an expectation of hampered output, world commodity prices have continued to surge.
The benefits to the miner are clear, when BHP reveals that its output and production is in fact breaking not just predictions but records, as opposed to the gloomy forecasts that effectively downplay expectations.
The results are clear record profits, higher share prices and fatter stakeholder dividends.
Deutsche Bank already says it is likely to upgrade BHP forecast earnings on the back of these numbers which have been much higher than market expectations and contrast proudly against the outlook of the previous quarter.
David Lennox says that BHP's strategy gives the miner an edge when it comes to reaping the fruits of reporting.
"What we would suggest is they (BHP) might conservatively say we would produce a certain amount and leave themselves a margin for error, so what that then allows them to do when, the year comes to fruition, is they can say 'look we have more than predicted.' He said. "They knew they had the potential to produce more."
