BHP Billiton: One for the Record Books

The Anglo-Australian mining giant reports record production in seven of its businesses, and it's gunning hard to buy rival Rio Tinto

Marius Kloppers, Chief Executive Officer of BHP Billiton, speaks at a press conference in Sydney, Australia. Sergio Dionisio/Getty Images

by Mark Scott

If commodity prices have peaked, someone forgot to tell BHP Billiton (BHP). The Anglo-Australian company—the world's largest miner by market value—announced on Aug. 18 a 14.7% jump in its net income for the year ended June 30, to $15.4 billion. Talking to investors, Chief Executive Officer Marius Kloppers dismissed concerns that problems currently affecting the U.S. and European economies would dampen the company's bullish outlook. Instead, the South African-born CEO stressed the role that developing economies, particularly India and China, would play in BHP's future.

"The long-term growth prospects remain strong," Kloppers reassured investors, although he later cautioned that "short-term global economic growth [will] slow."

Apart from the double-digit increase in net profit, Kloppers and his team have every right to be upbeat. BHP unveiled record production in seven of its core businesses, including petroleum, iron ore, and other commodities such as copper and energy coal. That reflects continued strong demand throughout the developing world, which underpinned a 25.3% increase in BHP's revenues for the year, to $59.5 billion. By the close of day, the mining firm's stock price in London had risen more than 1% as the market shared Kloppers' optimism about the company's performance.

Protected Against Drop in Metals Prices

No question, insatiable demand (BusinessWeek.com, 06/23/08) for commodities played a key role in helping BHP post its seventh-straight record annual profits. The company's diversified business should help protect it against an expected drop in metals prices over the next year that some analysts now predict could hit 25%.

None of BHP Billiton's three major business areas—base metals (copper, nickel, etc.), petroleum, and iron ore—constitutes more than a quarter of total revenues. That contrasts with Brazilian rival Vale (RIO), which relies on iron ore for 61% of its annual revenue. "BHP's operations leave it in an incredibly strong position over the next 12 months," says Charles Cooper, an analyst at London investment bank Evolution Securities. "Rising commodity prices and a diversified portfolio definitely have been a win-win [for the company.]"

Kloppers talked up this strategy on Aug. 18 as he updated the market on BHP's $150 billion bid (BusinessWeek.com, 2/13/08) for rival Rio Tinto (RTP). The nearly yearlong hostile takeover bid would create the world's largest mining company, with almost 40% of the world's iron ore production, and would be the No. 1 supplier to commodity-hungry China. "In the context of the demand challenges that the world will deliver, the combination of BHP Billiton and Rio makes more sense than ever," Kloppers says.

Rio Tinto Down on BHP's Bid

That perspective is hotly contested by Rio Tinto CEO Tom Albanese, who earlier this year told investors: "BHP needs Rio Tinto more than Rio Tinto needs BHP." Analysts expect the London-listed company to show a 46% jump in net profits when it reports first-half results on Aug. 26. Rio Tinto, which produces three times as much aluminum and 40% more iron ore than BHP, argues the proposed takeover won't create the cost savings Kloppers cites as the major motivation for the deal.