BHP Billiton Girds for Tough Medium Term

BHP Billiton, the world's biggest miner, braced for a very uncertain future as it reported a 2.2
percent increase in first-half profits, aided by a last burst of Chinese demand growth.

BHP's earnings are set to fall this year for the first time in a decade as oil and metals prices have slumped and demand for metals has dwindled as manufacturers slash production worldwide.

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In face of the downturn, the company already flagged it would shed 6 percent of its workforce and shut its Ravensthorpe nickel operation, with a $3.3 billion writedown on the project. It has warned it may have to close more mines.

"Momentum and risk in our view is still probably to the downside," CEO Marius Kloppers told analysts. "The turning point for any eventual recovery continues to be pushed out."

Analysts said BHP's underlying earnings were largely in line with expectations, but net profit appeared to have been hurt by a bigger tax cost than expected. They tipped the sharp slide in the December quarter was likely to continue in the second half.

"The momentum of the commodities market is negative and BHP still sees a very tough and volatile market in the next six months. Clearly they won't be able to repeat the types of numbers seen in the first half," said Tim Schroeders, a portfolio manager at Pengana Capital.

Despite the tough times, BHP still has a strong balance sheet, using its strong cash flows to cut net debt to $4.2 billion -- about a tenth of the net debt weighing down rival Rio Tinto.

"You can't argue with the balance sheet. They're probably positioning themselves to take advantage of some asset sales as they arise," said Michael Bentley, a portfolio manager at Northward Capital.

Rivals like Rio and Oz Minerals are desperate to sell assets to pay down debt.

"However being in this strong position does not mean immunity from the strong winds that are blowing," said Kloppers, adding the company would continue to trim production if necessary.

Asked if BHP might resume a share buyback, which was put on hold when the miner launched a huge hostile bid for Rio Tinto in 2007, Kloppers said now was not the time, given the uncertain outlook.

Reflecting the cloudy outlook, BHP matched Rio in reneging on a policy of steady dividend increases, holding its payout steady against the June half. However, that was up 41 percent on a year ago.

The company said commodity prices were likely to remain weak and volatile for some time.

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"Compared to how upbeat BHP was four to five months ago, this is a much more subdued outlook," said Peter Chilton, an analyst at Constellation Capital Management.

July-December profit before one-offs rose to $6.13 billion from $5.995 billion a year earlier, missing analysts' forecasts for $6.78 billion.

Costs increased by $1.9 billion, with nearly a third of that due to higher fuel, energy and raw materials, such as explosives, but those prices are now coming off.

Earnings from iron ore, its biggest earner, more than doubled to $4.1 billion, while earnings from petroleum jumped 36 percent to $2.7 billion.

The group's base metals division reported a loss, as sliding metals prices whacked $2.9 billion off its earnings.

BHP booked massive writedowns on its Ravensthorpe and Yabulu nickel operations and wrote off $450 million it spent on its Rio offer which it scrapped in November, knocking its net profit down to $2.62 billion.

BHP shares have climbed 7 percent in the three months since it walked away from its Rio offer, outperforming a 9 percent slide in the broader market and a 43 percent drop in Rio's shares.

The shares continued to beat the market on Wednesday, rising over 1 percent, while Rio was off 2 percent and the broader Australian market slid 1 percent.

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