On China's Love Affair with BHP Billiton

May.10.09 | About: BHP Billiton (BHP)

BHP Billiton (NYSE:BHP), the largest mining company in the world, enjoys balance sheet strength and financial security that most global companies, indeed most countries, would keenly like to replicate. The 2008 annual report, released before the global recession hit, is almost impossible to fault. Seven consecutive years of profit increases, an EBITDA (earnings before interest, tax, depreciation and amortization) interest coverage of 49x and $32.1bn returned to shareholders via dividends and share buy-backs, since the BHP and Billiton merger in 2001.

Clearly the company efficiently captured the growth in demand, primarily from Asia, for iron ore, copper, nickel, coal and oil, and rewarded shareholders handsomely. The headline figures point to an extremely well run company but hardly scratches the surface of the firm’s operations. BHP Billiton has an impressive portfolio of over 100 mining operations in 25 countries with (as at the end of the last tax year) a further 28 projects either in development or undergoing feasibility studies.

The current operations have accumulated $60bn of net operating cash flow in the last 5 years. Commentators have typically associated the terms “China” and “BHP Billiton” in the economic articles for some years now and for very good reason. Their future prosperity and growth are aligned not just in the demand and supply of commodities but fundamentally and politically.

China, committed to a unique style of capitalism within a controlled economy needs resources to maintain high economic growth rates thus allowing the spread of wealth through its enormous population. When BHP Billiton was honored with the task of producing the 2008 Beijing Olympic medals, it confirmed the company was not just another trade partner but was fundamental to the well-being of China, its economy and was in the thoughts of the highest echelons of Chinese political circles.

So the question for investors, considering that long term fundamentals remain excellent for BHP Billiton, is how has the worst global recession in 75 years hit current year demand for commodities and BLT profits? Casual observers may be surprised. The firm, in its recent production update, surprised markets with record year-to-date output of iron ore and oil. Interestingly, iron ore shipments canceled by some customers were sold on the spot market without discomfort.

Looking forward, there is further evidence, if any was needed, of the competence of management. The Q1 2009 exploration update should be renamed the “on schedule and on budget project update”. All the oil, gas and LNG projects, (Shenzi, Atlantis North, Pyrenees, Angostura, Bass Strait and North West Shelf) are on target. The Canadian potash project covering an incredible 7,000 square kilometers also highlights the firm’s determination to build on its current portfolio of products and secure new revenue streams.

Even in the absence of merger and acquisition activity, BHP Billiton can look forward to growth from expanding the output of its current portfolio of long life, low cost, upstream assets and even a sharp recession seems unable to hold back the success story.

Disclosure: The writer does not have an interest in any share or instrument that has direct or indirect exposure to any company mentioned in this article.