DBRS Confirms BHP Billiton at AA (low)

DBRS today has confirmed the AA (low) and R-1 (middle) ratings of BHP Billiton Ltd. and BHP Billiton plc (collectively, the Group, BHP Billiton or the Company). The trend for the ratings is Stable. The confirmation of the Group’s ratings reflects the strong business profile of the well diversified commodity producer, its solid financial profile and the resilience of its earnings and cash flow through the recent severe economic downturn. DBRS expects that reduced earnings and operating cash flow, combined with ongoing dividend payments and an aggressive capital expenditure program, will result in increased net debt levels for the Company in FY2010. In addition, coverage metrics are expected to reach or remain close to cycle-lows in the first half of FY2010 as the impact of lower iron ore, metallurgical and energy coal prices, is not fully offset by recovering metal prices. DBRS views the expected modest deterioration of financial metrics to be part of a normal cyclical pattern, which can be withstood by the Company due to its low leverage, good liquidity and strong balance sheet; hence the Group’s ratings remain on a Stable trend.

BHP Billiton is widely classed as the world’s largest mining company (by market capitalization) and is considered the model of diversification in terms of products produced, location of resource extraction operations and the Company’s balanced output of commodities that react to daily price changes and those that tend to be sold under annually-priced contracts. Nonetheless, BHP Billiton’s resource businesses can result in large changes in earnings and cash flow over an economic cycle, making the Company’s financial strength all the more important.

The Company’s strong market presence in steel-making materials (iron ore, metallurgical coal, manganese and nickel), metals (primarily aluminum, copper, lead and zinc) and energy-related materials (oil, natural gas and coal) has provided robust cash flow from operations ($15.4 billion per year on average over the last five years) and the ability to internally finance an aggressive organic growth program and a growing stream of dividends while maintaining industry-leading credit metrics.

Although BHP Billiton’s FY2009 straddled one quarter of a reasonably healthy world economy from July to September 2008 and three quarters of economic downturn following the financial collapse originating from the U.S. capital markets, the Company was able to report $16.2 billion in cash flow from operations and a reduction in net debt levels, even though record dividends and capital expenditure payments (totalling $15.8 billion) were made. The resilience of the Company’s diverse operations and the Company’s financial strength has been illustrated by its ability to take a $3.2 billion ($4.1 billion pre-tax) charge against earnings for the unsuccessful Ravensthorpe nickel project and related Yabulu refinery expansion, completed in FY2008 and shuttered in FY2009, yet still report $5.9 billion in net income.

BHP Billiton’s credit metrics remained strong in FY2009 with gross leverage of 28% (net leverage 12%), the ratio of cash flow-to-total debt of 0.98 to 1.00 and EBITDA gross interest coverage of 33 times. The Company also has substantial cash resources on hand as at June 30, 2009 ($10.8 billion), as well as an unutilized $3.0 billion credit facility.

DBRS expects that the Group’s earnings for FY2010 will be modestly lower than FY2009 due to lower prices for annually-priced commodities such as iron ore, thermal coal and metallurgical coal, despite our expectation of a gradual economic recovery building in Europe and North America beginning around mid-calendar year 2009. A recovery in metal prices (copper, aluminum, nickel, lead and zinc) from cycle-lows reached in the fourth quarter of calendar 2008 or first quarter of 2009 has already been significant, which should help offset lower earnings expected from the annually-priced commodities noted above.

Given the Company’s growth orientation and strong balance sheet, the potential of a major acquisition of resource assets cannot be ruled out as evidenced by the bid for Rio Tinto in 2008, but it is difficult to speculate on the impact of such an action on the Company’s business profile and financial metrics.

Nonetheless, BHP Billiton is expected to maintain its prudent financing policies aimed at maintaining its superior credit rating compared to its peers. The advent of economic recovery is expected to restore operating cash flows to the level that could support the $8 billion to $10 billion of capital expenditures seen in the last couple of years, but if cash flows are lower than expected, DBRS believes that BHP Billiton has the flexibility to defer capital projects or moderate dividend payouts in order to preserve its financial strength.

BHP Billiton continues to hone its competitiveness and influence on key commodity markets as seen by its recent announcement to consolidate its Pilbara region iron ore operations in Australia with those of the Rio Tinto group. The transaction, if completed as proposed, will increase BHP Billiton’s iron ore output and lower its cost of production, solidifying an already key position in that market. Over the long term, BHP Billiton will benefit from the ongoing growth in demand for the commodities that it produces from both industrialized and developing countries. The Company’s high level of investment in productive capacity of long-lived, low-cost operations will place it in good stead to benefit from the rising demand and prices of mineral commodities.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The ratings of BHP Billiton are based on public information.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.