MARKETS

Hogsback on the return of stability

IT IS cold comfort to workers who have lost their jobs in the coal industry over the past 12 months but as <i>Hogsback</i> was analysing the latest reports from two of the world’s biggest coal-mining companies he has decided that financial conditions are not as bad as they once were.

Staff Reporter

Recovery is the wrong word to describe what can be found in the annual report of Rio Tinto and the half-year report of BHP Billiton.

Recession is also the wrong word.

If there is a simple way of describing what can be detected in the financial statements it is stability, albeit stability at a relatively low level of profitability.

And that’s where the key lies to explaining the optimistic position reached by the coal industry after several very difficult years.

It isn’t as profitable as it once was – but neither is it losing money as it once was.

Rio Tinto and BHP Billiton do not tell the full story of coal today but when combined with the improving performance of other coal companies, such as Whitehaven, then a trend can be seen.

The trend is showing that a bottom has been reached in the down cycle with an up-leg in the cycle to come.

How this is possible given the current low prices for thermal and metallurgical coal is the interesting part of the turnaround, which has been achieved with much of the credit going to the painful cost-cutting and job shedding that has been undertaken, plus a boost from the Australian dollar exchange rate.

Rio Tinto was first to report in the current season and while the group’s overall result of a 10% increase in profit and a 15% increase in dividend captured the headlines there was plenty of encouraging news to extract from the detail.

In the coal business, Rio Tinto boosted output of all three categories, with thermal coal production up by 11%, semi-soft coking coal up by 17% and coking coal up by 2%.

While the tonnes are easy to see in the accounts the financial performance is not so easy with coal and uranium being lumped together under a generic heading of “energy” – with uranium being a major loser for Rio Tinto.

Coal operations in Australia were surprisingly robust with earnings before interest, tax, depreciation and amortisation from coal amounting to $US1.04 billion ($A1.15 billion) from revenue (coal sales) totalling $4.4 billion.

The net earnings figure shrinks to $367 million after all statutory and accounting charges are applied but that EBITDA number is telling a fascinating story because it is fractionally higher than the 2012 EBITDA number of $1.03 billion – which was what Rio Tinto coal in Australia generated in 2012 from revenue of $4.99 billion.

Get it? After all the grim news about coal over the past 12 months Rio Tinto actually earned more from reduced revenue – not a lot more but more in any sense of the word is a big plus.

BHP Billiton, much to The Hog’s surprise, performed a similar trick with coal business EBITDA for the six months to December 31 higher than that earned during the first six months of last financial year.

According to Tuesday’s half-year report BHP Billiton’s Queensland coal business generated EBITDA of $614 million from revenue of $2.39 billion.

The previous corresponding figures were EBITDA of $78 million from revenue of $2.12 billion.

The overall coal business of BHP Billiton, which includes mines in South Africa, Colombia and the US, generated EBITDA of $1 billion, more than double the earnings for the first six months of last year, which totalled $492 million.

The better-than-expected performance by BHP Billiton’s coal division was attributed to “productivity-led volume and cost efficiencies”, according to management comments in the company filing at the Australian Securities Exchange.

Of particular significance were the improvements achieved at the BHP Billiton Mitsubishi Alliance where something akin to a miracle was achieved in the latest half year where “Australian dollar unit cash costs declined by a substantial 25%”, the company said.

The overall coal division results by both big miners are subject to layers of accounting, financing and statutory charges, which amount to what might be called a swings-and-roundabouts exercise.

But, even after allowing for exchange rates, coal prices, cost cutting and port charges the net result is that both Rio Tinto and BHP Billiton posted profits from their coal operations in their latest reporting periods – and a profit is always better than a loss.

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