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What to take from BHP Billiton Limited’s results

Following on from a solid performance announced by Rio Tinto Limited (ASX: RIO) for the 2013 financial year, BHP Billiton Limited (ASX: BHP) yesterday reported what was an outstanding set of results for its half-year ending 31 December 2013.

The results were proof for investors that there is certainly still life remaining in the mining sector. In fact, given the increased internal competition for project funds, the group said that an average return of more than 20% after-tax is achievable for their portfolio of major development options in the future.

After years of below-par results, the mining giant delivered a first-half underlying profit of US$7.76 billion – an increase of 31% on the previous year and exceeding analysts’ expectations by nearly $1 billion – this was largely driven by productivity improvements, increased volumes and greater cost-cutting initiatives.

Cost cutting initiatives

Compared to 2012, the miner reported productivity savings of US$4.9 billion while it is aiming to extend that figure to US$5.5 billion by the end of June. Similarly, Rio Tinto reported cash cost improvements of $2.3 billion for the year and is aiming for a further $3 billion in cuts in 2014.

While both companies are only around 15 months into their cost cutting phases under the new leadership of Andrew Mackenzie (BHP) and Sam Walsh (Rio Tinto), there are still another 2 years’ worth of improvements to be made. At the same time, Deutsche analyst Paul Young recognised that both miners are reporting their fastest pace of production growth in more than a decade which is helping to improve margins – an ever important factor as commodity prices remain volatile.

BHP yesterday reported a 10% increase in production which included 108 million tonnes of iron ore from its Western Australia Iron Ore (WAIO) division, an annualised production rate of 68 million tonnes from Queensland Coal and a 9% increase in petroleum liquids production to 50 million barrels of oil equivalent.

Dividend

Although the miner only increased its interim dividend by 3.5% to US59c a share (the market had been hoping for US62c per share), there is a very real possibility that shareholder returns could increase as early as August in the form of a share buyback program. Net debt is expected to fall below US$25 billion by June from today’s $27.1 billion figure which would lead to capital management initiatives being explored by the company. It is expected that Rio Tinto could make a similar move six months later.

Foolish takeaway

Although the results from both miners were certainly pleasing, Andrew Mackenzie remained cautious regarding iron ore, pointing to a slow start to the year for Chinese steel production and predicting supply growth will overtake demand growth. This would push the price of iron ore downwards, impacting margins.

While Rio Tinto, Fortescue Metals Group Limited (ASX: FMG) and Arrium Limited (ASX: ARI) are heavily exposed to the iron ore market, BHP maintains far more diversified operations making it less susceptible to a fall in price. As such, BHP is the most attractive prospect from the mining sector at today’s price of $38.89.

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

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