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Must-know: The outlook for BHP and NewCo
BHP’s outlook seems to be positive considering the productivity and cost control measures that the company has initiated. With fewer assets to manage, BHP Billiton (BHP) should be able to improve productivity quicker. The company is targeting at least $3.5 billion of sustainable, productivity-led gains by the end of fiscal year 2017
BHP Billiton (BHP) is a major worldwide producer of aluminium, manganese alloy, and nickel. Alumina production increased by 6%. Aluminium production was flat year-over-year (or YoY). Manganese ore production declined by 3%. Nickel production declined by 7% YoY.
Copper production increased by a modest 2% year-over-year (or YoY) to 1.7 million tons. Record mining rates were achieved at Olympic Dam—increasing by 11% YoY. The company predicts that copper production will increase by 5% to 1.8 million tons in FY15.
Metallurgical coal production increased by 20% year-over-year (or YoY) in fiscal year 2014 (or FY14). This record production includes the first production from Caval Ridge’s hard coking coal project. The project delivered three months ahead of schedule. It was also under budget.
Total petroleum production increased by 4% in fiscal year 2014 (or FY14). However, the highlight was the increase in liquids production. It was supported by a 73% increase in Onshore U.S. liquid volumes and nearly doubled production at Atlantis. This is important to note because liquid volumes are more profitable.
Iron ore is BHP’s largest division. It contributes to ~32% of revenues and 52% of earnings before interest and taxes (or EBIT) for fiscal year 2014 (or FY14). Western Australian Iron Ore (or WAIO) achieved its14th consecutive annual production record with 204 million tons.
The newly formed company (or Newco) will operate 11 assets in Australia and southern Africa. It will have a joint venture interest in Brazil. It will also be a diversified company like BHP (BHP). It will have exposure to manganese, precious metals, base metals, metallurgical coal, and energy coal.
The new company (or NewCo) will be an Australian incorporated company. It will be listed on the Australian Securities Exchange (or ASX). It will also have a secondary listing on the Johannesburg Stock Exchange (or JSE). It will have an American Depository Receipt (or ADR) in the U.S.
BHP’s CEO said that the company will consider returning cash to the shareholders when the net debt comes below $25 billion. The company was close to that target with a net debt figure of $25.8 billion. However, it still didn’t announce any capital management measures.
BHP Billiton’s (BHP) results were broadly in-line with market expectations. BHP’s underlying net profit after tax (or NPAT) of $13.45 billion is in-line with the $13.6 billion consensus expectation. It’s 10% year-over-year (or YoY) growth was driven primarily by cost efficiencies and volume growth.
BHP’s work is organized into five business units—petroleum and potash, copper, iron ore, coal and aluminium, and manganese and nickel. It’s headquartered in Melbourne, Australia. BHP operates through 100 locations in 25 countries. It was created when BHP and Billiton merged in June 2001.
More than 3% of electricity produced globally is used in aluminum extraction. In Australia, one of the world’s largest bauxite producers, 12% of electricity consumed went into aluminum production.
Aluminum has been used in automobile production for a long time. Although steel continues to be the major raw material for auto companies, aluminum has managed to find new uses in automobiles.
Three factors are expected to impact aluminum companies going forward: aluminum capacities, financial demand, and auto companies.
The returns for companies like Alcoa (AA) and Century Aluminum (CENX) have more than doubled in the past year. Constellium (CSTM) has given around 70% returns, while Kaiser Aluminum (KALU) has lagged with around 15% returns.
Contrary to global expectations, China has increased its smelting capacities in the past decade. There are plenty of reasons behind this move.
With a mammoth 1.4 billion population and a growing economy, China currently dictates the global commodity market. Both iron and steel industries are reeling under the impact of China’s slowdown.
There were complaints from beverage companies like Coca-Cola (KO) and SABMiller because they weren’t able to meet the aluminum requirements for their bottling plants.
The price paid by aluminum consumers isn’t the prevailing price on the London Metal Exchange. The buyers have to pay a higher price for the aluminum that they purchase—the premium.
Aluminum has become a favorite for investors who want to diversify their portfolios. After the global recession, it’s emerged as a hard asset.