BHP stands tall amid price falls

7 Sep 2012, 6:33 pm   -   Source: AAP
BHP Billiton might not win any popularity contests for postponing multi-billion dollar mining projects such as Olympic Dam but it is earning the respect of the financial community. (AAP)

BHP Billiton might not win any popularity contests for postponing multi-billion dollar mining projects such as Olympic Dam but it is earning the respect of the financial community. (AAP)

BHP Billiton's involvement in a diverse range of commodities makes it look attractive in the wake of this week's iron ore carnage

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BHP Billiton might not win any popularity contests for postponing multi-billion dollar mining projects such as Olympic Dam but it is earning the respect of the financial community.

Ratings agency Standard & Poor's (S&P) reaffirmed its stable outlook and single A credit rating for the "Big Australian" on Friday.

Lower iron ore prices and debt would reduce the buffer around that rating but it still had the best asset diversity of its peers, S&P said.

Two days earlier, Fitch downgraded its outlook for the iron-ore only Fortescue Metals Group to negative from stable, due to plunging prices for that commodity and worries about its ability to repay more than $US8.5 billion ($A8.3 billion) of debt.

A month would appear to be a long time in the resources world.

In August BHP chief executive Marius Kloppers was hammered when the miner wrote down the book value of its $US20 billion ($A19.53 billion) purchase of US shale assets, along with its Australian nickel mines by $US3.3 billion ($A3.15 billion).

This week petroleum boss Michael Yeager talked up their $US1 billion US Eagle Ford shale expansion, amid gas price rises and strong oil prices.

Mr Kloppers and Mr Yeager gave up their bonus but the former is now said to be energised by the fact that weaker Chinese demand for iron ore makes the decision to further diversify BHP look like a right one.

The company's share price is down 12 per cent for the year but has outperformed Rio Tinto and Fortescue's stocks, which are heavily exposed to iron ore.

Iron ore represented more than 90 per cent of Rio Tinto's profit in its recent half year result and all of Fortescue's.

The commodity was still BHP's biggest earner but garnered less than 50 per cent of profit, with the maligned petroleum division earning about 20 per cent of profits, and coal and copper making contributions above 10 per cent.

Mine Life senior resources analyst Gavin Wendt said company executives and boards faced a conundrum because a company like BHP should be thinking more than a decade ahead but faced pressure for quick results from large, institutional shareholders.

"BHP in particular was criticised by major shareholder BlackRock for making too many long-term decisions because they operate on a three-year investment horizon," he told AAP.

"They wouldn't have gone in to shale thinking: judge us on the performance of the shale business after six months, it's crazy.

"This current market has huge volatility and commodity prices have been plummeting, so as a result of that every decision looks bad."

BHP angered the South Australian Government for what was seen as a relatively last-minute decision to postpone the $30 billion Olympic Dam expansion, but for BHP it was a no-brainer due to the high costs.

It is focused on a mantra of diversified large, long-life, low-cost assets currently focused on iron ore, coal, copper, petroleum and potash.

It sees the last three as representing consumption- based commodities that China and other emerging economies will demand more of into the future as its economy matures and steel-related ron ore and coking coal became less relevant.

Iron ore demand growth is seen as tailing off from 2025 by BHP.

Mr Wendt said the company had probably focused too much on iron ore in recent years at the expense of their other businesses, warning that people had short memories and the world often changed very quickly.

He also questioned the wisdom of it divesting its nickel, aluminium and other less profitable businesses for the same reason and the hedging value they hold, with the oil price sometimes up when iron ore was not for instance.

BHP considered selling their petroleum business in the 1980s, he said.

"Lo and behold, before the iron ore boom petroleum was their biggest income earner and is still a major contributor to their earnings," he said.

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