BHP’s report strong, but blemished

A strong report doesn’t offset all of the risks facing the company.

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Investors pushed BHP Billiton (ASX: BHP) shares up 2.8% this week after it released a pleasing production report for the year ended 30 June 2013 – aided largely by strong fourth quarter results which defied poor weather.

Whilst each of the company’s divisions recorded gains for the year, one of the most pleasing signs was an increase in iron ore production. Despite strong rains hitting its Western Australia operations throughout June, the miner’s strong fourth quarter pushed its iron ore production to exceed expectations. In fact, whilst the company produced a 13th consecutive annual record for iron ore production of 170 million tonnes (an increase of 7% from the prior year), its fourth quarter’s annualized rate was 217 million tonnes, implying that the rate will likely continue to increase in future periods.

Following his induction as CEO earlier this year, Mackenzie promised investors that the company would cut costs from a peak of more than $22 billion to around $18 billion by the end of next year. He also stated that higher productivity was a must for the company in order to achieve long-term sustainability. As stated by The Australian, “the strong performance from the mining operations is a positive signal for investors keeping a close eye on BHP’s stated determination to improve productivity and lower costs under new chief executive Andrew Mackenzie.”

Furthermore, the company also announced that its Jimblebar mine expansion was around three months ahead of schedule and is now expected to begin in December.

Although it was a strong report however, BHP is still facing strong headwinds. Firstly, production of petroleum failed to meet guidance due to non-operated shortcomings in the Gulf of Mexico whilst the company also went significantly over budget on growing the US onshore shale oil-gas business. Meanwhile, the increases in production will not be enough to offset the effects of lower commodity prices which are still volatile. When the company releases its full year profit, it is still expected that a mere US$12 billion will be recognised, compared to US$17.1 billion last year.

Foolish takeaway

BHP is the most attractive listed miner on the stock exchange, due to its operating of much more diversified projects than competitors such as Rio Tinto (ASX: RIO) or Fortescue Metals (ASX: FMG). Currently priced at just over $34.00 per share however, the sidelines may still be the best option for investors until volatility in the sector begins to subside, or at least until the company releases its annual report, which will give investors a better guidance.

Rio Tinto released its second quarter operations report on Tuesday, and Fortescue will release its report next Tuesday.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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