DBRS Confirms BHP Billiton Ratings at AA (low) with Stable Trend

DBRS has today confirmed the Issuer Ratings of BHP Billiton Ltd. and BHP Billiton plc (collectively, BHP Billiton or the Company) at AA (low) and their Commercial Paper ratings at R-1 (middle), each with Stable trends. BHP Billiton is the best in class in the DBRS-rated universe of mining companies as a result of its well-diversified and competitive operations and solid financial profile.

The confirmation reflects BHP Billiton’s position as a diversified and competitive resource producer that has generated strong operating cash flows allowing the Company to largely internally finance its organic growth program, dividends and share repurchases while maintaining a very healthy credit profile through the recent recession. BHP Billiton’s ratings incorporate its ability to withstand, better than most industry peers, economic shocks and mitigate risks associated with high commodity price volatility and the industry trend toward large investments in often risky political jurisdictions. The Company’s R-1 (middle) Commercial Paper ratings are supported by robust operating cash flow and a strong liquidity position, with $16 billion in cash, $4 billion in undrawn credit facilities and access to U.S. commercial paper markets.

BHP Billiton has generated in excess of $20 billion in EBITDA (as calculated by DBRS) in each of its last five fiscal years since F2006, averaging $21.8 billion per year. Performance in the first half of F2011 was even stronger, at an annualized rate of $34.0 billion, with a promising outlook for the second half of the year. The key drivers behind this performance have been the growing demand for commodities from developing countries (led by China) and a general lack of investment in productive capacity among commodity producers in the last ten years to meet that demand.

During the five years ending June 30, 2010, BHP Billiton invested $87 billion in capital expenditures and paid $18 billion in dividends, but with relatively stable and high operating cash flows, net free cash flow totalled $20 billion. Despite $12 billion in net share buybacks (and essentially neutral acquisitions and dispositions), net debt declined by $5 billion during the period. As a result, the Company’s balance sheet and key credit metrics have been very strong. With record earnings achieved in the first half of F2011, credit metrics remain very solid for the Company’s ratings, with a negative net debt position at the end of 2010 (gross debt-to-capital ratio was modest at 22%), EBITDA-interest coverage of 59 times and cash flow-to-debt of 1.8 times, which were all well above industry peer group averages.

DBRS views BHP Billiton as being acquisition oriented and expects that the Company may use its balance sheet strength to support large-scale acquisitions in the future. The Company has been an active participant in several large acquisition attempts but since F2006, net acquisitions have been under $3.0 billion. Even the $4.8 billion Fayetteville shale gas acquisition completed in March 2011 (after the latest reporting period) was modest when compared with the Company’s size. However, the potential for future large-scale acquisitions, which may materially alter BHP Billiton’s credit metrics, remains.

Despite its many strengths, BHP Billiton remains a commodity producer, subject to often volatile commodity prices. The source of strength in this sector since the year 2000 has been the remarkable growth of China and other emerging economies as they urbanize and industrialize. This growth has led to a long rise in commodity prices that generally peaked in 2007/2008, only to be interrupted by the great recession of 2008/2009. Virtually all commodity prices were negatively affected by the downturn, but despite large drops, prices in most cases did not fall to unusually low levels. The recovery in 2009/2010 has been dramatic, with some prices (such as iron ore) now charting record territory. With most miners rushing to add capacity and the underpinning of the sector’s strength very dependent on continued growth in emerging economies, one needs to keep the cyclical nature of the sector in mind when contemplating BHP Billiton’s strong performance and that of others in the sector.

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.