BHP Billiton Reports 1Q Results

BHP Billiton's BHP fiscal first-quarter production performance had a similar feel to Rio Tinto's RIO . Most assets are operating at or close to capacity, and compared with the fourth quarter of fiscal 2010, petroleum, alumina, copper, iron ore, and energy coal all enjoyed stronger sales volume. Exceptions were aluminum, down sharply because of the timing of shipments （production actually rose marginally）, and nickel and coking coal.

We were a touch disappointed by key divisions copper, iron ore, and coking coal--all below expectations. These are the three major value drivers for BHP, and their performance is crucial. We remain positive on BHP. It remains the preferred of the diversified majors--subject to stock price, of course.

We noted Rio Tinto's lackluster output from copper operations, and BHP is no different. BHP's equity copper output fell 30% since the second half of fiscal 2008, from 727,000 tonnes to 507,000 tonnes in the second half of fiscal 2010. Olympic Dam had issues with its Clark shaft in 2010, but even so, decline in head grade at the likes of Escondida is a key factor. It's not all bad, though, with the pattern not confined to BHP and Rio Tinto.

London Metal Exchange copper stockpiles fell 30% from 550,000 tonnes to 375,000 tonnes over the past six months and copper prices jumped 35% to $3.75 per pound, with U.S. dollar weakness helping. BHP's base metal revenue has risen since the first quarter of fiscal 2010 despite softening copper output. The metal could again soon be testing $4 per pound.

Iron ore is a different matter, with production rising relatively consistently for more than a decade. Tie-in activities for RGP-5 took the shine off the first quarter, though output was still above both the fourth quarter and the previous corresponding period.

There were no real issues other than a lost opportunity with the failed Pilbara iron ore joint venture with Rio Tinto. Coking coal output was affected by maintenance at Queensland and Illawarra. Heavy Queensland rains restricted overburden removal, which could further crimp second-quarter production. Energy coal volume rose strongly, by 16% to almost 18,000 tonnes. Continued ramp-up at Klipspruit and improved performance from Khutala, both in South Africa, drove the increase.

Aside from commodity prices, and given that the iron ore joint venture is now dead, key uncertainties are the PotashCorp POT bid and the Mineral Resource Rent Tax. The press has the Saskatchewan authorities keen to reject the bid, something we suspect the market wouldn't be too upset about. And something is brewing on the MRRT front, with miners bristling at federal resource minister Martin Ferguson's comments that the commonwealth would not offset any future state royalty increases. There are many moving parts to this, not the least being potential for the greens to drive a harsher bargain if a satisfactory deal isn't voted through before the formation of a distinctly less mining-friendly Australian senate in July.