Fernando MonteiroBHP Billiton Net Profit Falls Abruptly
August 16th 2009 13:11
BHP Billiton has been hit hard by the current recession and its net profit has fallen by 62 per cent to US$5.88 billion, this way ending a seven year cycle of increasing profits. Is mining not attractive anymore? Stay with me.
Mining is a simple economic activity: basically, you prospect an area, when you hit on something you get a licence to mine and you then transport your product to somewhere your customer requires.
The trick with mining is to manage efficiencies. You have to produce large amounts of mineral and you have to strictly manage the costs if you are to make a profit. Some of the costs are huge: a rig tire costs $10,000. Explosives cost millions. Imagine how much a hundreds of kilometre train line costs.
There are two categories of mining companies: the large companies and the small ones. The small mining companies often behave like very speculative businesses: if they find some mineral deposit their share price rockets up in the expectation of the mining profits, otherwise their price is flat.
Large mining companies such as BHP Billiton (BHP) and Rio Tinto (RIO) are rather diversified by product and by geography. Diversification by product has the effect of averaging their cash flows, being that when certain products’ prices fall, desirably others rise.
Diversification by geography, which means that these companies hold mines in many other countries than Australia, may have an effect on currency exchange when repatriating profits. It can also have the effect of compensating for a recession in some part of the world with production in other areas that wouldn’t be suffering a recession. In any case, the recession of 2008-09 has been world wide and simultaneous.
BHP’s average return on equity for the last six years is an astounding 35.32 per cent, being its net profit margin a no less astounding average of 24.45 per cent for the same period. Its revenues, currently at $62,607.8 million, increased in the last six years by a compounded 11.14 per cent per year. Its equity more than doubled in the same period to $49,240.8 million. Moreover, BHP’s share price, now at $38.26, didn’t fall with the bad news.
As a matter of fact I’ll keep an eye on BHP.
Mining is a simple economic activity: basically, you prospect an area, when you hit on something you get a licence to mine and you then transport your product to somewhere your customer requires.
The trick with mining is to manage efficiencies. You have to produce large amounts of mineral and you have to strictly manage the costs if you are to make a profit. Some of the costs are huge: a rig tire costs $10,000. Explosives cost millions. Imagine how much a hundreds of kilometre train line costs.
There are two categories of mining companies: the large companies and the small ones. The small mining companies often behave like very speculative businesses: if they find some mineral deposit their share price rockets up in the expectation of the mining profits, otherwise their price is flat.
Large mining companies such as BHP Billiton (BHP) and Rio Tinto (RIO) are rather diversified by product and by geography. Diversification by product has the effect of averaging their cash flows, being that when certain products’ prices fall, desirably others rise.
Diversification by geography, which means that these companies hold mines in many other countries than Australia, may have an effect on currency exchange when repatriating profits. It can also have the effect of compensating for a recession in some part of the world with production in other areas that wouldn’t be suffering a recession. In any case, the recession of 2008-09 has been world wide and simultaneous.
As a matter of fact I’ll keep an eye on BHP.
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