bhp billiton poised for record profit

Ben Sharples - August 15, 2008 03:55pm

BHP Billiton Ltd, the world's biggest mining company, is set to deliver a record annual profit in excess of $US15 billion ($A17.26 billion), underpinned by a strong result from its petroleum division.

Chief executive Marius Kloppers will unveil the result in London on Monday, and analysts are tipping a 14.8 per cent rise in 2007/08 profit to $US15.4 billion ($A17.72 billion).

BHP Billiton is reaping rewards from the rapid urbanisation of China and other developing nations that has been driving up demand for commodities and their prices for the past seven years.

Its result will be supported by rises in production and prices for oil, copper, iron ore and coal in the second half of the year.

BHP Billiton's petroleum division, the key differentiator between it and takeover target Rio Tinto Ltd, is expected to be a strong performer after the price of crude oil soared to new record above $US100 per barrel.

"One of the big positives is going to be the oil price - that's going to be the major point of differentiation between BHP and Rio Tinto as far as the market is concerned," Fat Prophets analyst Gavin Wendt said.

"We saw spot oil prices hit a record high of $US147 per barrel and that has to have a positive rub-off on their earnings."

Rio Tinto chief executive Tom Albanese has questioned the merits of having a petroleum business inside a mining company, but others, including the world's largest gold producer, Barrick Gold, are starting to see the benefits.

Barrick last month agreed to buy Cadence Energy Inc for $C410 million ($A445 million), which will allow the gold miner to hedge about 25 per cent of it oil use.

Mr Albanese, who has ruled out diversifying into oil, will unveil Rio Tinto's half year profit result on August 26, and analysts are tipping a 44.7 per cent rise in profit to $US5.1 billion ($A5.87 billion).

While strong demand and prices for commodities is boosting profits, the impact of higher energy, labour and consumable costs, along with exchange rate movements, are also key issues.

Weighing on BHP Billiton's result will be the Varanus Island gas explosion in June, which disrupted supplies to many mining operations in Western Australia, and flooding at its coal mines in Queensland's Bowen Basin.

"While the market is generally aware of cost pressures throughout the industry, we are concerned that there is a tendency to underestimate the quantum of cost increases," Goldman Sachs JBWere said in a client note.

However, Fat Prophets' Mr Wendt said the major mining companies have been able to maintain rising costs and there was unlikely to be "too much negative news on the cost side of things" for BHP Billiton.