BHP Production Boost

Sydney, July 24, 2008 (ABN Newswire) - It was an excellent final quarter and full 12 month production report from BHP Billiton: records for many of its commodities, especially the important iron ore business.

In fact it matched nicely the upbeat tone from the Rio Tinto 2nd quarter and first half production report a week ago.

But oil prices sank on Tuesday night, hitting a six week low of just over $US127 a barrel, a fall of more than $US20 a barrel in three weeks. So it's no wonder that punters ignored the good news in the production report, looked at oil, and then marked down BHP shares.

They fell 32c to $38.68, while its target, Rio, fell 60c to $120.10 a share. The 3.4 share offer for Rio was valued at $131.51 at BHP's close yesterday.

Just as Rio did by singling out its iron ore business for special mention (production up 13%-14% in the quarter and the half), BHP did likewise with its iron ore business. Not only did production rise 15% to a record 111.3 million tonnes, BHP forecast a possible 23% jump this year in production.

Rio lifted first half iron ore production 14% to more than 79 million tonnes and is aiming to get well beyond 160 million tonnes for the year to December.

BHP said annual production was significantly up in 13 commodities, with records achieved in seven commodities.

These records were delivered in 14 assets across six of our nine Customer Sector Groups (CSG).

BHP said annual production records achieved in petroleum, copper, iron ore, manganese ore and alloy, alumina and molybdenum.

Annual production also increased in crude oil and condensate, uranium, lead, zinc, silver and diamonds.

"This was achieved in an environment in which supply disruptions and input cost pressures are placing challenges on the industry response to continued strong global demand for commodities.

"We achieved record shipments in iron ore and manganese, at a time when pricing reached unprecedented levels and demand outlook remains very strong. Western Australia Iron Ore achieved an eighth consecutive annual production record, maintaining an exceptional track record of project delivery.

"Metallurgical coal production recovered strongly from the extreme weather interruptions during the March 2008 quarter and quarterly production records achieved in alumina, copper, iron ore and manganese ore."

The company said annual production records delivered in Western Australia Iron Ore, GEMCO, TEMCO, Illawarra Coal, Hunter Valley Coal, Minerva and Worsley (all Australia), Escondida (Chile), Samarco and Alumar (both Brazil), Samancor (South Africa), Cerrejon Coal (Colombia), Zamzama (Pakistan) and Paranam (Suriname).

"Quarterly production records delivered in Escondida, Yabulu (Australia), Western Australia Iron Ore, GEMCO, Samarco, Samancor, Alumar and New Mexico Coal (USA).

"Annual volume growth of 27 per cent in crude oil and condensate from the continuing ramp up of newly commissioned projects and strong operational performance.

"Annual uranium oxide concentrate production at Olympic Dam (Australia) was the highest since the Western Mining (WMC) acquisition.

"Ramp up of production from these projects and future growth options will continue to increase the weighting of high margin liquids in our portfolio mix at a time of historically high oil prices.

"We continue to develop and deliver world class projects that add significant shareholder value. First product was delivered from 10 major projects across five commodities during the year. A further seven major projects were sanctioned during the period.

"Over the past quarter we announced a significant increase in our iron ore and manganese resources and reserves.

"This, along with the Pampa Escondida prospect (Chile), are excellent examples of our deep inventory of expansion options. These options are underpinned by an extensive exploration and development program."

In terms of earnings, the higher output of iron ore and oil and gas will enable the company to take advantage of the price rises for the commodities that occurred in the quarter.

Coking coal exports will earn more, but the full benefit won't come until the next quarter when the Queensland mines ramp up to full capacity.

Record demand for iron ore and coal from countries like China and India, and record prices for oil, will contribute billions in dollars in profits to BHP in the June 30 year.

BHP last year reported net profits up by more than quarter to $US13.4bn. Ahead of the production report analysts from ABN Amro in Australia had forecast record profits of $US16.1bn for the 2008 year.

BHP said its fourth-quarter iron ore output rose 15% to a record, driven demand from China. Iron ore production rose to 29.7 million tonnes in the June quarter from 25.7 million tons a year earlier.

The company forecast that 2009 output could rise 23% to 137 million tonnes.

"We achieved record shipments in iron ore and manganese ore at a time when pricing reached unprecedented levels and demand outlook remains very strong,'' the company said in the statement to the Australian stock exchange.

"Supply disruptions and input cost pressures are placing challenges on the industry response to continued strong global demand for commodities.''

Output of coking coal fell 18% because production was cut from its mines in Central Queensland. Output is now recovering and the mines are operating at 90% capacity.

The company said crude oil and condensates output jumped 54% in the fourth quarter, due to the start-up of fields in the Gulf of Mexico and Australia.

Oil and condensates production rose to 17.6 million barrels in the three months ended June 30, up from 11.4 million a year earlier. That increase drove a 20% gain in total oil and gas output in the quarter.

BHP started up the Genghis Khan and Atlantis South oil fields in the Gulf of Mexico and the Stybarrow field off northwest Australia between October and December last year, boosting crude output as prices advanced. The start-ups contributed to a record annual output of oil and gas of 129.5 million barrels, up 13%.

"Newly commissioned petroleum projects in fiscally stable regimes contributed to a record performance,'' BHP said in the statement."Ramp-up of production from these projects and future growth options will continue to increase the weighting of high-margin liquids in our portfolio mix at a time of historically high oil prices.''

BHP also started up the delayed Neptune petroleum project in the Gulf of Mexico earlier this month. Six of seven wells at Neptune have been completed and the project is moving to full output.

BHP said that the North West Shelf venture's Angel natural gas project, due to start up at the end of this year, was ahead of schedule and budget.

Here's what BHP said about its various businesses:

Total Petroleum Products – Strong growth in production mainly due to the continued ramp up of Stybarrow (Australia), Genghis Khan and Atlantis (both USA), excellent operated facility performance and record natural gas production. Record quarterly production and a 13 per cent year on year volume growth is a strong start to our expected 10 per cent compound annual growth rate through to financial year 2011.

Crude Oil, Condensate and Natural Gas Liquids – Production was higher than all comparative periods due to significant growth in high margin crude production. Continued ramp up of new projects and successful development drilling more than offset natural field decline in existing fields.

Natural Gas – Second consecutive record annual production due to increased demand in Australia as well as continued strong market growth in Pakistan.

Alumina – Annual production and sales records were achieved for the second consecutive year. All operations achieved record annual output. Worsley operated consistently above the expanded nameplate capacity. Production was marginally higher than the March 2008 quarter.

Aluminium – Southern African smelters continued to operate at reduced levels to comply with the mandatory reduction in power consumption. This was in part offset by equal annual record production from Alumar.

Copper – A third consecutive annual production record was set with the continued ramp up of Escondida Sulphide Leach and Spence (both Chile) and Pinto Valley (USA). In aggregate, these projects contributed 244,300 tonnes for the year ended June 2008. This was achieved despite the impact of two earthquakes in Chile in the December 2007 quarter.

Production increased by 19 per cent versus the March 2008 quarter. In addition, Olympic Dam performed at the highest level since the WMC acquisition, with the build up of underground stockpiles progressing according to the development program.

At 30 June 2008, the Group had 327,941 tonnes of outstanding copper sales that were revalued at a weighted average price of US$8,555 per tonne. The final price of these sales will be determined in the 2009 financial year. In addition, 311,410 tonnes of copper sales were subject to a finalisation adjustment from the prior period. The finalisation adjustment and provisional pricing impact as at 30 June 2008 increased earnings by US$225 million for the period.

Total copper production at Escondida is expected to decline by approximately 10 to 15 per cent in the 2009 financial year compared to the 2008 financial year levels due to lower ore grade.

Production is then expected to continue at similar levels to the 2009 financial year. The Escondida resource base presents numerous options for delivering production growth in future years, which are currently under study. Exciting results from exploration of the Escondida mining lease are being obtained in areas close to existing infrastructure and processing facilities, including the new Pampa Escondida prospect.

Lead – Production for the year ended June 2008 increased due to the completion of the Cannington (Australia) rehabilitation project. Production was lower compared to the March 2008 and June 2007 quarters due to reduced mill throughput and head grades.

Zinc – Production was higher than all comparative periods mainly due to improved grade and an increased proportion of zinc containing ore being processed at Antamina (Peru). The completion of the Cannington rehabilitation project also positively impacted production for the year ended June 2008.

Silver – Production for the year ended June 2008 improved significantly due to the successful completion of the Cannington rehabilitation project and record performance from Escondida and Antamina. Production decreased versus the March 2008 and June 2007 quarters primarily due to lower head grades at Cannington.

Uranium – Production increased significantly due to improvement in recovery and leach circuit performance at Olympic Dam. Olympic Dam achieved the highest production since the WMC acquisition and an all time record of ore hoisted and material milled. Third party products were purchased from the spot market to meet contractual requirements. This decreased earnings (b) by US$187 million for the financial year.

Diamonds – Production increased compared to the March 2008 quarter mainly due to a record volume of ore processed during the quarter. As Ekati (Canada) transitions from open pit mining to underground mining the mix of ore processed will change from time to time. In the year ended June 2008, Ekati processed a higher proportion of higher value carats from both Koala and Panda undergrounds versus the year ended June 2007.

Nickel – Production for the year ended June 2008 was impacted by industrial stoppage at Cerro Matoso (Colombia), wet weather interruptions at Yabulu and scheduled maintenance across all operations. This was partially offset by strong production from the Kwinana Nickel Refinery (Australia) and the continued ramp up of Ravensthorpe and the Yabulu Expansion Project (both Australia).

The start up of operations at Ravensthorpe and the Yabulu Expansion Project adversely impacted earnings by US$313 million for the year ended June 2008. Towards the end of the June 2008 quarter, Kalgoorlie Nickel Smelter (Australia) commenced a major rebuild of the furnace. The duration of the rebuild is estimated to be around four months. Kwinana Nickel Refinery production will be impacted for the duration of the rebuild.

Iron Ore – Record production and shipments were achieved for the year and quarter ended June 008. Western Australia Iron Ore and Samarco (Brazil) set annual and quarterly production records. Successful delivery of ongoing expansion projects led to an eighth consecutive annual production record at our Western Australian iron ore operations.

The Samarco expansion project delivered first production during the quarter and continues to ramp up in line with schedule. With the successful ramp up of Western Australia Iron Ore Rapid Growth Project 3 and continuous operational improvement, Western Australia Iron Ore is expected to produce 137 million tonnes (100 per cent basis) in the next financial year.

Manganese Ore – Production for the year and quarter ended June 2008 were all time records for all operations. South African operations achieved a third consecutive quarterly record despite the impact of the mandatory 10 per cent reduction in power consumption. Furthermore, GEMCO production benefited from the implementation of improvement initiatives in preparation for the expansion project.

Manganese Alloy – Record annual production due to improved facility availability and utilisation at EMCO and Samancor. This was achieved despite the impact of the mandatory 10 per cent reduction in power consumption and load shedding in South Africa.

Metallurgical Coal – Production and shipments were impacted by extreme wet weather experienced at Queensland Coal (Australia) during the March 2008 quarter. Production recovered strongly with force majeure lifted during the June 2008 quarter. Recovery efforts continue and on average, mines are operating at approximately 90 per cent capacity.

The extreme weather and declaration of force majeure also resulted in delivery delays for some of the 2007 sales contracts. Sales from Queensland Coal during the 2008 financial year are estimated to include 2.1 million tonnes of coal priced at the higher agreed prices. Approximately 1.4 million tonnes of coal that will be delivered in the first quarter of the next financial year will be sold at 2007 prices.

Illawarra Coal (Australia) had record annual production despite production for the June 2008 quarter being impacted by a planned longwall move.

Energy Coal – Production was in line with the year ended June 2007. Record annual production was achieved for the third consecutive year at Cerrejon Coal and second consecutive year at Hunter Valley Coal. New Mexico Coal production for the June 2008 quarter reached an all time high following the scheduled longwall move at San Juan (USA).


 

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