Escondida Benefits

BHP Billiton posted first-half FY17 operating earnings of US$9.9 billion, some 2% ahead of Ord Minnett’s forecast and 3% ahead of the consensus compiled by the company. The result was strong at the headline level but we view it as a relatively low-quality beat, given the US$275 million of cost credits at Escondida related to inventory movements.


An interim dividend of 40.0 cents a share was broadly in line with our 41.0 cents forecast, and equated to a 66% payout ratio, above BHP’s minimum 50% target.


FY17 costs have been adjusted up for higher currency, while capital expenditure guidance for FY17 and FY18 is up US$200 million and US$100 million to US$5.6 billion and US$6.3 billion, respectively, to reflect increased petroleum exploration.


Net debt came in at US$20 billion with gearing of 24%, also beating expectations on a US$2 billion fair value adjustment from interest and currency movements.


We believe BHP would like to see gearing fall into the high teens before commencing a buy-back. The gearing target is likely to be reached in FY18, however, if buoyant spot prices hold.


BHP's financial health has materially improved, but we maintain our Hold recommendation and $25.00 target price as we see more attractive investment options elsewhere in the sector. Our preference is for Rio Tinto (RIO, Accumulate) based on its more attractive valuation, growth outlook and balance sheet.

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