BHP Billiton's underlying first-half 2010 earnings declined 7% to $5.7 billion, close to our $5.9 billion forecast. Headline profit increased 134% to $6.1 billion, including a $433 million post-tax reversal of Ravensthorpe nickel impairments. Key drivers versus first half 2009 were lower iron ore, coal, and aluminium prices, all but offset by a combination of higher copper and nickel prices, general volume gains, and cost control, excluding exchange rate and inflation impacts. Prices were more important than volumes by a factor of four. Half year production records were set in iron ore and petroleum.
BHP bettered our petroleum, carbon steel materials, and diamond division forecasts, but under-performed on the aluminum, copper, and nickel front. Copper operating costs were worse than anticipated, exacerbated by the Clark shaft outage at Olympic Dam, responsible for 75% of hoisting capacity at the mine. Re-commissioning and ramp-up at Clark is expected is to finish by the end of June.
Overall we are pleased with the result. Underlying EBIT margin remained strong at 34%. ROIC was 18.6% despite new as-yet-non-productive capital. BHP spent $4.6 billion in the period, and completed the Alumar alumina refinery expansion in Brazil, the WA iron ore Rapid Growth 4 project, and Klipspruit energy coal in South Africa.
Management remains reasonably upbeat about the improving economic outlook, though with cautious overtones about the likely speed and strength. We agree that potential for supply to fall short of demand exists in the longer term given the lack of development expenditure in recent history.
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One surprise was the dramatic decline in operating cash flow impacted by increased working capital associated with the recovery in commodities demand and pricing. Net operating cash flow declined 56% to $5.7 billion versus our $8 billion forecast, although the prior period was flattered by the opposite: reduced working capital. Gearing consequently climbed from 14% to 18%. We expect some of the differential will be unwound in the second half. Still, our fiscal 2010 and 2011 earnings forecasts decline a touch. A heavier call on cash balances is a factor, but we've also marginally raised cost expectations and lowered our outlook for near-term prices.
The weightier call on cash rests even more heavily on the biggest surprise in the result, increased guidance for capital expenditure, now at US$11.1bn and US$13.8bn in 2010 and 2011, respectively.
One final minor positive was the 42 cent interim dividend versus our 41 cent forecast. This translates to 82 cents per ADR. Shares trade ex-dividend on March 1, with payment due on March 23.
