BHP Billiton CEO Andrew Mackenzie prepares to discuss the company's annual results at a meeting in Sydney. File photo: REUTERS
BHP Billiton CEO Andrew Mackenzie prepares to discuss the company's annual results at a meeting in Sydney. File photo: REUTERS

It is curious that just as metals prices turn down, shares in miner BHP Billiton should spring back to life. CEO Andrew Mackenzie has brought the group through the worst of its problems, including a dam disaster at its Brazilian iron ore joint venture and activist demands for BHP to rethink its entire structure. Yet rising costs should still be cause for concern.

First the good news. The numbers in Tuesday’s full-year results were a tad lower than expected, but most of the damage came via extraordinary charges in the second half of the year. These included the impairment to BHP’s US onshore business, including any goodwill, plus charges for the Samarco accident in Brazil and the impact of the US tax reform on its balance sheet. Adjusted for all of those, the miner delivered profits of $8.9bn — up a third on the previous year.

BHP agreed to divest its US shale oil assets to BP in July for $10.5bn. Its shares have rebounded this year, outrunning the FTSE All-Share mining index by 18%. Not even activist Elliott Management moans much any more.

But the miner admits that costs for copper and conventional oil production are going to creep up. Investment should help. Its oil team can boast a string of successful wells recently — four of five drilled — which should arrest any natural production declines.

Those fixes may ease the pressure. But they can still be counteracted by market forces. A key factor to watch is the price of iron ore. Each dollar-per-tonne move shifts BHP’s earnings before interest, taxes, depreciation, and amortisation (ebitda) by almost $230m. Stubbornly strong Chinese steel demand has so far supported iron ore but its price has moved sideways for the past 18 months.

Mackenzie has proved himself a sturdy leader. He stood his ground against activists by retaining conventional oil and maintaining the dual listing structure. Keeping a lid on overheads when metal prices are sagging will be a harder challenge.

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