wednesday, page-12

Some interesting observations from the report. Good cash flow performance, but it would appear as if commodity price falls have well and truly not flowed through to the P&L yet. Here are a few comments on each business line.

Iron Ore - Performance obviously very strong with EBIT of $4.1 billion, reflecting the higher contract price negotiated for this year (approx $90 tonne). Slide 35 of the presentation however suggests that for a $1 move in Iron Ore price this will have an $80m impact on net profit. With negotiations for the current year approaching and falls of 40% expected, this could have a hugely damaging effect on profits. Using the $90 reference price and 40% price fall this has a whopping $2.88 Billion hit to the profit.

Petroleum - UNderlying EBIT of $2.675 Billion. This was achieved with an average sale price of $85.22 for the half year. Referring to the presentation on page 35 a $1 fall on the oil price has a $35m impact on net profit after tax. Lets assume they achieve $50 going forward, and there you have another hit of $1.2 Billion.

Metallurgical Coal - Underlying Ebit of $3.123 billion. Like Iron Ore this performance reflects the contract prices locked for this year of approx $300 a tonne. Slide 35 indicates that a $1 move in price has a $25m impact on net profit after tax. With other producers (ie Rio) already negotiating 50% price cuts back to $150, this sort of price impact would have a further $3.75 Billion hit to P&L. This not to mention the production cuts of 10 to 15% that have recently taken place.

Manganese - Underlying Ebit of $1.245 Billion, an increase of 188.9%. There is not as much information provided on Manganese, however this commodity has been one of the hardest hit in the past 6 months, with prices back to 2005 levels. In 2005 BHP produced similar production volumes but made only approx $125m from this product. Therefore you would expect significant drops in P&L on the commodity with potential for another hit up to $1 billion.

Base Metals - Loss of $111m a decrease of $3.478 Billion on last year. This obviously reflects the drops in base metal prices we have seen over the past 6 months, and this indicates what sort of impact this magnitude of price falls can have on the P&L.

Energy Coal - Underlying Ebit of $1.072 Billion. Energy coal prices have not fallen as much as other commodity prices. So although profit falls would be expected, not as significant as the others.

AUD - The AUD for the period averaged 0.78. The presentation on page 35 indicates that for each cent fall in the AUD BHP make $25m. Therefore if we assume the exchange rate average 0.60 going forward (0.65 at the moment), this 18 cent fall results in a $1.44 positive to the p&l.

Rand - The rand for the period was at 8.83, with the presentation indicating a RANd 0.2 down having a $25m effect on profits. Lets it averages the current exchange rate of 6.94 going forward. This 1.89 rand move accounts for 9.45 lots of 0.2 rand, therefore resulting in a p&l impact of approx positive 236mill

Therefore assuming prices stay around about where they are now for the medium term (as they say). Doing a quick and dirty calculation this results in a $7.15B hit to P&L against the recent half year results. This show magnitude of the sort of P&L hit you can expect when the reality of current commodity prices flows through to underlying earnings - and remeber this does not even factor in any likely production cuts.

Unless yuo believe we will see a strong rebound in commodity prices, yuo would have to look at the current BHP share price with some apprehension.