Commodities slump will see the miner reveal a near 50pc decline in underlying income
Mining giant BHP Billiton (NYSE: BBL – news) is expected to report its weakest annual earnings in five years this week and unveil deeper cuts to spending in order to maintain its dividend.
The company is expected to reveal a near 50pc decline in underlying net income to around $ 6.6bn (£4.2bn), hit by sharp falls in the value of commodities over the last year, according to City analysts.
A collapse in Chinese demand for key raw materials such as iron ore, copper, and coal has hit miners such as BHP Billiton hard with billions of dollars wiped off their share prices. Last week, Glencore (Xetra: A1JAGV – news) , one of its biggest rivals, saw its share price hit an all-time low after a 46pc fall during 2015.
Shares (Berlin: DI6.BE – news) in BHP Billiton are down 41pc over the last 12 months, closing at £10.66 yesterday. The miner has also been hammered by the fall in oil and gas prices due to its significant petroleum liquids business, mainly in North America.
“BHP is exposed to prices of oil and gas as well as iron ore, copper and metallurgical coal. The strength of currencies in producing countries is also a major risk to our valuation as is political risk in the countries in which BHP operates,” said RBC Capital in a note to investors ahead of the company’s earnings.
Given the weak market for resources, cutting costs is expected to remain at the top of chief executive Andrew Mackenzie’s agenda into 2016. The company has talked over the last year about “squeezing the lemon” further in terms of savings and reining in investments. * Miners dividends face the axe as metal prices tumble * BHP Billiton taps City for mining spin-off * BHP Billiton sees profits drop 31pc as commodity markets collapse According to RBC Capital, the company had flagged that it would deliver $ 3bn of cost savings for the full-year and had already found $ 2.4bn in efficiencies by the first half. Under Mr Mackenzine, BHP Billiton has trimmed down significantly to focus on four pillars: iron ore, copper, coal and petroleum liquids.
Some analysts argue that the mining giant will have no alternative other than to cut back further on spending through to 2016 if it wants to maintain its progressive dividend policy which has been a cornerstone for investors.
The broker Liberum said that it expects further aggressive capital expenditure cuts to be announced.
It (Other OTC: ITGL – news) will be the first set of full-year financials that BHP Billiton has posted since the spin off of its non-core assets into South 32 earlier this year.
As part of that divestment plan the company had said it would take a $ 2.1bn (£1.3bn) earnings charge.
This was due to the difference between its valuation of the business and the shares’ price when they first traded in May when the latest dip in commodities markets took hold.
Like many of its rivals, including Glencore, it is also nursing relatively high debt levels having borrowed during the boom years to finance ambitious expansion projects.
The consensus among analysts is for BHP to still hold $ 25.2bn of debt on its balance sheet when it reports earnings (Other OTC: UBGXF – news) .
