BHP Billiton, the UK-Australian mining giant, saw shares rising over 3% at trade opening.
Having seen core commodity prices slump by over a half in the past year, BHP Billiton are the next in a line of miners to not only half the profit outlook but issue massive spending cuts.
Capital and exploration expenditure was reduced by 23% to US$6.4 billion in the half year and plans were reported to invest a total of US$12.6 billion in the 2015 financial year and US$10.8 billion in the 2016 financial year.
Net income has fallen by 47% to $4,265 million; Billiton’s answer is to split its assets in a huge sell-off to shareholders, and to initiate spending cuts allowing the company to generate US$4.1 billion of free cash flow and strengthen the balance sheet despite lower prices.
Announced in the latest interim results for the half-year ended 31 December 2014 on 24 February, BHP Billiton Chief Executive Officer, Andrew Mackenzie notes, “Following the proposed demerger, BHP Billiton will maintain its progressive dividend policy and any dividends from South32 will represent additional cash returns to shareholders.”
South32 is the name of the new company that will be formed through the demerger plan where Billiton will separate its assets into two distinct companies: a simplified BHP Billiton and a new, independent global metals and mining company - South32. The company says, ‘A demerger has the potential to unlock shareholder value by allowing BHP Billiton to improve the productivity of its largest businesses.’
A shareholder vote will take place in early May 2015 to approve the plan, with the proposed demerger remaining on track to be completed in the first half of the 2015 calendar year.
The interim results show a disappointing decrease in Basic earnings per share down 47.7% to 80.2 (cents), from 2013 results of 152.4. However, productivity levels are reassuring with rig counts down but output still level, demonstrating that efficiencies are working. In response to lower prices, the company said it ‘will reduce operated rig count at Onshore US by approximately 40 per cent by the end of the 2015 financial year.’
Further cuts in the petroleum division are encouraging and in line with oil prices falling by 50% over the last year. The Financial Times reports that, ‘US onshore drilling programme will be cut to $2.2bn next year, compared with about $4bn previously expected.’
Confidence in the demerger plan and future operational profit is interesting investors with Asian markets rallying initially on Tuesday by over 3% as BHP also announces a raise in its interim dividend by 5%.
MT4 chart: BHP Billiton
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