By Eric Dutram
Although earnings season may be over for the most part, a couple of key international firms still have to give their most recent updates. One of the most important firms in the world for commodity investors falling under this category of companies is undoubtedly BHP Billiton (BHP), the world’s biggest mining company. The Australian mining giant was put under the microscope yesterday, giving analysts its results and outlook for the future, neither of which disappointed investors.
The company announced a second-half of the year profit record, beating out analyst estimates thanks to sharp increases in prices for industrial metals and energy products such as coal and petroleum. In fact, net income nearly doubled, rising from $6.6 billion in the year ago period to $13.1 billion for the first half of this year, beating out estimates by about $500 million. To top things off, BHP announced that it would be paying out a dividend of 55 cents a share to investors, five cents greater than a UBS estimate and nearly 22% higher than the year ago period. Yet despite these robust figures, shares of BHP were flat in New York trading, largely thanks to heavy losses in the gold market which saw the precious metal decline by close to $100/oz. and sent traders running from mining stocks across the board.
Nonetheless, BHP gave a rather solid outlook for investors for the rest of the year, suggesting that robust levels of demand for its key products could persist in many rapidly developing emerging markets. “We expect robust demand in the short-and-medium term, supported by commodities-intensive emerging economic growth,” the company said in a statement. “A more positive demand dynamic remains a distinct possibility should policy be enacted to further stimulate growth in the developed world.”
This is especially true for iron ore and coal, two key ingredients in the production of steel that BHP has market leadership in. Given the high levels of demand in countries such as India, China and Indonesia, the company’s continued ability to extract more of the product from the ground has been nothing but good news for the firm’s bottom line and could continue to drive earnings for years to come as these nations go further down the path of industrialization. “The profit margins and the earnings growth through production growth that we’re seeing from the mining companies make us actually very bullish.” said Catherine Raw of BlackRock after the company’s earnings release.
Clearly, China is still the main player in the commodity game so any shifts in trends coming from that massive nation will undoubtedly influence global commodity prices and flow through to BHP’s earnings for the rest of the year. Given how hard China is trying to cool off its economy, investors should consider this risk to global commodity prices in the near term. This could also be an issue in other emerging nations, specifically Brazil and India, which are experiencing high degrees of inflation and may look to apply similar measures in order to prevent extreme price increases to their populations. Beyond macroeconomic inflation, investors should also consider how rising wage costs in several key markets may impact earnings for BHP later on in the year as well. If wages increase and commodity prices fall, investors could see BHP’s bottom line be severely hurt considering how "sticky" wage hikes tend to be, especially when comparing them to the often volatile swings in the commodity market.
Overall, there are certainly some huge risks facing BHP as it goes into the second half of its fiscal year. Yet, with that being said, the future could be bright for a number of sectors assuming that the economy remains at least somewhat stable in emerging markets. After all, China is expected to grow by at least 7% a year so further demand of commodities is all but guaranteed for a variety of products. Given how eager BHP is to spend on more capital projects and acquisitions, as well as its relatively solid capital structure, the future could be very bright for BHP and its widely diversified lineup of commodities. This should help soothe investors’ worries over the recent short-term volatility in the natural resource market and suggest that further gains could be had in both the mining and futures markets based on BHP’s great outlook.
Disclosure: No positions at time of writing.