MELBOURNE/LONDON (Reuters) - The world’s biggest miner BHP Billiton on Tuesday said deep cost cuts and a steady elimination of oversupply will bolster its business following a record loss caused by a bad bet on shale and a dam disaster in Brazil.
The firm’s share price BLT.L (BHP.AX) was trading about 1 percent higher by 1530 GMT, building on a rally of nearly 14 percent since the start of the year, driven by a recovery in commodity prices.
Many investors are wary of the commodity price rally, saying it has been fuelled by Chinese financial stimulus rather than a real recovery in demand or any output curbs from the big producers.
BHP Chief Executive Officer Andrew Mackenzie, however, told reporters he saw signs of a fundamental change and there was no longer a sense that commodity prices were “in free fall”.
“Steadily, the end of the supply creation on the back of the China boom is coming to an end, product by product, and that’s putting more of a floor under price than perhaps perceptibly existed maybe a year ago,” he told a news conference in London.
Commodity markets hit multi-year lows in January following a realisation Chinese demand was weaker than thought and supplies of raw materials could be in surplus for the foreseeable future.
In response, miners have focused on lowering costs and reducing debt levels. BHP said it was on track for productivity gains of $2.2 billion (£1.69 billion) over the two financial years to the end of June 2017.
The efforts should see it double its free cash flow to more than $7 billion this year at current prices for its major commodities, iron ore, copper, coal, and oil and gas.
For the year to the end of June, BHP reported a record $6.4 billion net loss after $7.7 billion in write-downs and charges while underlying profit slumped 81 percent to $1.2 billion.
Disappointed as he was by the loss, Mackenzie said the exceptional causes would not be repeated.
BHP has booked $12.8 billion in write-downs over the past four years on its shale business as it has cut its oil and gas price assumptions. It also in July flagged a provision of $1.1 billion to $1.3 billion to cover the costs of a dam disaster in November at the Samarco iron ore mine in Brazil.
“The underlying business I think remains strong, getting stronger,” Mackenzie said.
Underlying profit was the weakest since BHP and Billiton merged in 2001, but better than analysts’ expectations of about $1.1 billion, underpinned by iron ore and copper.
“While the headline loss is horrific, BHP is performing well on an underlying basis,” Jefferies analyst Chris LaFemina said in a note.
BHP has underperformed rivals. Rio Tinto’s (RIO.AX) (RIO.L) share price is up about 25 percent this year while the sector as a whole .FTNMX1770 has gained nearly 70 percent, though in many cases, the gains are from a very low base.
The petroleum business, which sets BHP apart from its peers, slipped to a loss, as it cut output from its U.S. shale wells in response to a steep fall in oil prices. Like other commodities, oil has rallied from multi-year lows hit early this year.
Mackenzie said the company remains committed to holding the onshore U.S. petroleum business, alongside its mining assets.
“There are many who choose to hold our bonds and our shares who see that that combination provides a dampening of long-range volatility that attracts them to invest. It’s a fundamental part of how we work,” Mackenzie said.
Shoring itself up against tough markets, BHP, like rival Rio Tinto, in February abandoned its long-held policy of never cutting dividends, and flagged instead it would pay out at least 50 percent of underlying profit from then on.
It announced a full-year dividend of 30 cents, which it said was more than the minimum under its new payout policy, but just below analysts’ forecasts of about 32 cents.
Net debt rose slightly from December to $26.1 billion, which was higher than the $25 billion analysts had expected, but BHP said it expects it to fall in the 2017 financial year.
Additional reporting by James Regan in Sydney; editing by Richard Pullin and David Clarke