Global mining giant BHP Billiton today revealed a boost to its interim dividend after posting a swing back to profit due to higher iron ore prices.
For the six months to 31 December 2016, BHP Billiton said it made an attributable profit of $3.2bn (£2.6bn), up from a loss of $5.7bn the previous year.
Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 65 per cent to $9.9bn, while revenue increased to $18.8bn from $15.7bn.
The miner announced a higher than expected interim dividend of 40 cents per share, an increase of 16 cents from the previous year because of confidence in the company's performance.
Revenue from iron ore mining, BHP's biggest division, benefited from a 28 per cent rise in its ore selling price over the period. Copper increased 14 per cent and oil seven per cent, the company said.
The miner's London-listed shares jumped 1.82 per cent at 1,425.5p in morning trading.
Why it's interesting
BHP's results come on the back of a surge in commodity prices in 2016 and renewed demand in China. According to Reuters, iron ore climbed more than 80 per cent and coal increased as much as 300 per cent.
This allowed the board to boost its interim dividend by 10 cents from the minimum required.
"Clearly they're reasonably confident on where iron ore prices are at the moment. The balance sheet gearing has come back down," said Argo Investments senior investment officer Andy Forster.
Rival miner Rio Tinto also surprised investors earlier this month with a higher dividend and a $500m share buyback.
But BHP warned the iron ore market will likely come under pressure in the short term from moderating Chinese steel demand growth, high port inventories and incremental low cost supply.
The firm also said its copper production guidance for the 2017 financial year under review as a result of ongoing industrial action at Escondida, the world's biggest copper mine.
The firm also today announced a bond repurchase plan of up to $2.5bn, to be funded from its cash pile, in order to extend the average debt maturity profile and thus "enhance [BHP's] capital structure", said Yuen Low, analyst at Shore Capital.
What BHP Billiton said
Chief executive Andrew Mackenzie said the strong result comes after years of working to improve productivity and redesign the company's portfolio and operating model.
Our assets are large, long-life and low-cost and provide exposure to a diverse mix of commodities with an attractive outlook. Our new operating model has sharpened the focus of our operations on the things that matter most: safety, volume and cost. A decline in unit costs at our major assets supported $1.2bn of productivity gains in the half, which follows the $11bn of annualised gains embedded over the last four years.
Mackenzie said the firm is confident in the long-term outlook for commodities, particularly oil, with markets expected to rebalance in the near-term, and he expects a deficit to emerge in the copper market in the early 2020s.
What analysts said
Low said despite the strength of the first half of the year, BHP is cautious about its short-term outlook. Low added:
In China, it expects “a cooling of growth rates in the housing and automobile markets in combination with a continuation of strength in infrastructure” – with the possibility that exports could “be challenged by the rising threat of protectionism”.
In the US, it sees potential for “a higher inflation environment than previously envisaged” but the impact is “unclear, notwithstanding infrastructure related announcements”.
Copper is expected to “maintain a well-supplied market in balance” in the short-medium term, whereas iron ore is seen as likely to “come under pressure in the short-term from moderating Chinese steel demand growth, high port inventories and incremental low cost supply”. In metallurgical coal, China’s coal supply reform policy “is a source of short-term uncertainty”.
George Salmon, equity analyst at Hargreaves Lansdown said investors shouldn't ignore the group's excellent progress on cost control. In the long term, Salmon said BHP has "some of the lowest cost assets out there" and a "rapidly improving balance sheet".