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Market Reaction to BHP Billiton’s Largest Loss of Fiscal 2016

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BHP’s biggest loss ever

On August 16, 2016, BHP Billiton (BHP) (BBL) reported a loss of $6.4 billion for fiscal year ended June 30, 2016. The loss was driven by a number of impairments such as Samarco, US Onshore, and global taxation matters. While this is the company’s largest full-year loss ever, it was expected.

But BHP’s results were not without positives. The company’s underlying EBITDA (earnings before interest, tax, depreciation, and amortization) was $12.3 billion, which was a 4% beat on Market expectations. Its underlying profit of $1.2 billion was also ahead of consensus estimates by 11%.

BHP also expects to drive $1.8 billion in productivity improvements in fiscal 2017. That should also drive free cash flow of $7 billion, according to the company’s estimates.

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Stock price performance

BHP stock rose by 0.4% after its fiscal 2016 results. Macquarie upgraded BHP stock from “underperform” to “neutral” on August 17, 2016. This caused the stock to rise 3.3% compared to a rise of 2.3% for Rio Tinto stock.

On a YTD (year-to-date) basis, miners have gained due to firmer commodity prices, especially for iron ore. On a relative basis, Cliffs Natural Resources (CLF) has outperformed its peers with a YTD rise of 276% on August 17. Vale (VALE) followed with a YTD rise of 89%.

Cliffs has other drivers behind its rally, including improving sentiment in the US steel market, its main customer focus. However, among seaborne-exposed names, Vale has risen the most. Rio Tinto (RIO) and BHP Billiton (BHP) (BBL) have risen by 7% and 11%, respectively.

CLF forms 3.4% of the SPDR S&P Metals and Mining ETF (XME). RIO forms 1.8% of the SPDR S&P Global Natural Resources ETF (GNR). VALE forms 2.9% of the iShares MSCI Brazil Capped (EWZ).

In this series, we’ll analyze BHP’s earnings for fiscal 2016. We’ll also discuss management’s outlook and see how it’s trying to position the company in this volatile commodity price (COMT) environment.

Let’s start by looking at BHP’s cost-cutting efforts in its iron ore division.

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