BHP Billiton finished the year on a production high in most commodities that matter. A notable exception was copper which, despite being 22% ahead of 2010's third-quarter levels, at 280,000 metric tons, was still below expectations. Lower grades at Escondida and a later-than-anticipated restart to hoisting from the damaged Clark Shaft at Olympic Dam more than offset a return to full capacity at Spence and improved Cerro Colorado plant utilisation. Copper is a major profit centre for BHP, around a quarter of group earnings before interest and tax for the last three years, and a challenge to replace.
Fortunately, relative outperformance from oil, coking coal, nickel, and to a lesser extent iron ore and aluminum, combined to alleviate copper's shortcomings. Diversification is a particularly strong feature for BHP. Oil benefitted from first production from the Pyrenees project on March 1. The Stybarrow project also grew output from diminished levels during the third quarter of 2010. Coking coal enjoyed improved operational and supply chain performance and strong underlying demand following the weather-interrupted third quarter. Nickel West upped its game since the smelter rebuild during fiscal year 2009. Iron ore was strong despite impacts from Rapid Growth Project 4 tie-in activities.
We retain our positive view on BHP. Annual production records for Petroleum and WA Iron Ore are highlights. Earnings forecasts change little, but valuation increases courtesy of upgrades in outlook for petroleum, iron ore and coking coal production.
BHP said it "continues to be cautious on the short term outlook for the global economy. Uncertainty surrounds the near-term prospects for growth in the developed world as governments adjust fiscal policies following a period of significant stimulus and subsequent increase in sovereign debt levels. Within China, measures introduced to reduce growth to more sustainable levels means volatility in commodity end-demand is likely to persist. BHP sees these measures as a normal continuation of China's economic management policies."
The company spent $516 million on minerals exploration, and $817 million on petroleum exploration during fiscal year 2010. The former includes $73 million on potash drilling in Saskatchewan, Canada. It apparently got value for money reporting a preliminary Jansen potash resource of 3,370 million metric tons at 25.4% K2O. Jansen is nearing the end of its prefeasibility study, and is anticipated to progress to feasibility during the first half of fiscal year 2011. On this basis, you'd think BHP has a long-life mine, and could produce saleable product from 2015. It's an interesting diversification into a bulk commodity with large growth potential. Potash is used in fertilisers to improve water retention and crop yield, nutrient value, taste, colour, texture and disease resistance. Expanding populations and land and water shortages are likely to drive increasing intensity of use.
