BHP Billiton’s reasons to be cheerful, despite $6.4bn loss

BHP Billiton

BHP Billiton, the world’s largest mining company by market capitalisation, reported a loss of $6.4bn today, triggering an initial drop in its share price and contributing to an early slide in the FTSE 100 index.

Analysts had expected a substantial loss, but this record drop exceeded their worst expectations. Of the loss, 75% was attributed to impairment and write-down costs on the company’s overvalued US shale assets, and most of the remainder on legal and reputational expenditure following the death of 19 people when a dam burst at its Samarco mine in Brazil last November.

It has certainly been a disastrous year for BHP Billiton, and while a human and environmental disaster of Samarco proportions is extremely unlikely to be repeated, the Chief Executive warned that commodity prices were likely to remain low and volatile for the short to midterm.

Views are divided as to what will happen with commodity prices, but BHP is well-positioned to benefit from changes in appetite with a diversified portfolio including iron ore, copper and uranium, as well as coal and shale gas.

In June, it announced that it would steer clear of major exploration projects in iron ore, potash and coal in order to concentrate on oil and copper. Copper is currently stockpiled in Asia as demand from the Chinese electricity sector has declined, but most prospects are bullish in the midterm, given the metal’s incorporation into everything from aquaculture to air conditioning units. It is also used extensively in renewable energy systems thanks to its excellent conductivity and the fact that it can be fully recycled.

These encouraging market indicators, together with the company’s prudent financial approach of slashing dividends and reducing capital expenditure, seem to have satisfied the markets that BHP has the management and strategy to reverse this decline.

The share price had recovered by mid-morning, up by 3.26%, with analysts recommending a hold.