BHP reported their 2016 year results this week, the media circus would have you thinking that it was all over for BHP, when in fact the share price rallied on the back of the report. Not because it was great news but it was better than expectations. See below chart.
The result was down on the previous year as commodity demand and pricing is driven by global economic activity, in particular Chinese economic growth. Poorly timed acquisitions within the commodity price cycle and write-down of Samarco mine to nil value contributed to substantial asset write-downs of US$7.7bn in FY16
The overall result was nevertheless a bottom of the cycle figure at US$1.2bn, down 81% on last period. Controllable expenses were good with unit costs down 16% and a further 12% decline is forecast for FY17. Gearing of 30% is high but strong free cash flow will see this fall over time. We expect improvement in times ahead given the low financial year 20016 base and with a lower cost structure and greater financial discipline.
The dividend was cut as expected. BHP may not be a raging buy at present but certainly one to continue to hold for now. It is looking cheap at the current levels but the slump in sales is expected to continue for some years yet.