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BHP Billiton Limited’s profit soars 31% – here’s everything you need to know

Mining heavyweight BHP Billiton Limited (ASX: BHP) has this morning delivered an impressive set of results for its first-half ending 31 December 2013, driven by a “substantial improvement in productivity” and greater product volumes as well as a continued effort to aggressively minimise operating costs. The company’s shares were boosted by 2% following the results.

While the group’s profit soared 83% to US$8.1 billion for the half, the exclusion of one-off factors saw BHP’s underlying profit rise 31% to US$7.76 billion, compared to US$5.94 billion for the previous year. This was still well ahead of the market’s expectations of roughly US$6.93 billion. Meanwhile, underlying earnings before interest and tax (EBIT) also increased by a solid 15% to US$12.4 billion for the period.

Cost Cutting

According to the company’s chief executive Andrew Mackenzie, the strong result was largely driven by significant cost savings, which the group has previously stated it wished to decrease by around 25% to US$16 billion this financial year. Citing the group’s ability to increase volumes and productivity, Mackenzie said: “Annualised productivity led volume and cost efficiencies totalling US$4.9 billion are now embedded and this is expected to increase to US$5.5 billion by the end of the 2014 financial year.”

Given the company’s increased internal competition for project funds, BHP believes that an average rate of return of greater than 20% after-tax is achievable for its portfolio of major development options.

Operating Performance

Over the half, the company delivered a 10% increase in production whereby records were achieved across three commodities, namely iron ore, coal and petroleum.

Western Australia Iron Ore (WAIO) recorded production of 108 million tonnes, a figure which was boosted by the earlier-than-expected first production from the Jimblebar mine. Productivity improvements also saw Queensland Coal boost its annualised production rate to a record 68 million tonnes in the December quarter, while petroleum liquids production also jumped 9% to 50 million barrels of oil equivalent for the half year. This result was underpinned by a 72% increase at Onshore US.

Copper production also increased to 843 thousand tonnes, an increase of 6%.

The group maintained its full-year production guidance for iron ore and metallurgical coal as well as petroleum and copper.

Capital Management

While investors had been hoping for an interim dividend of US62c a share, the miner only raised it by 3.5% to US59c per share, equalling last year’s final dividend in line with recent practice. Despite an otherwise strong half, this decision could upset investors, as was the case when Commonwealth Bank of Australia (ASX: CBA) delivered a record annual profit but didn’t announce a special one-off dividend payment.

On the other hand, the company did decrease its net debt level from US$29 billion to US$27.1 billion. A strong cash flow is projected which the company expects to approach its target of US$25 billion by the end of the 2014 financial year. Once hit, the company will likely undertake a share buyback program which would greatly improve shareholder returns.

Outlook

Although the company expects Chinese steel production growth rates to decelerate in the short term (which would see supply exceed demand growth for commodities such as iron ore), it also anticipates that demand for steel making raw materials from other emerging markets should rise. In particular, this would likely benefit the group’s coal division, given the reliance of these markets on higher quality imported products.

The global economy is also expected to continue strengthening although growth rates will likely moderate.

Foolish takeaway

Although BHP and Rio Tinto Limited (ASX: RIO) have both released strong results over the last week, investors still need to be wary of the risks facing the sector. BHP maintains far more diversified operations and, as such, is a much safer bet for investors to consider.

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

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