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, the Group 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 Group’s diverse operation, low-cost production, long-life reserves of its core products (iron ore, copper, coal and oil and gas), and large size, which allows the Company to tackle costly, technically complex projects around the globe, underlie its ratings. BHP Billiton maintained a strong balance sheet and liquidity even during the year ended June 30, 2009 (FY 2009), which fully captured the recession in the latter half of 2008 and first half of 2009. The key driver behind this performance has been the growing demand for commodities from developing countries, led by China.

BHP Billiton achieved record earnings before non-recurring items in the year ended June 30, 2011 (FY2011) as commodity demand and prices increased from the FY2009 recession. Earnings in H1 FY2012 slipped by 6% compared to H1 FY2011, as record-level production volumes (mainly the record Western Australia Iron Ore production) and higher realized bulk commodity and petroleum prices were insufficient to offset cost increases.

BHP Billiton continues to generate strong positive net free cash flow, combined with, to date, relatively modest acquisitions, resulting in a strong financial profile supportive of its current ratings.
The Group’s credit metrics remained very strong in FY2011 and currently in FY 2012, despite a 268% increase in net debt to $21.5 billion in the first half of FY 2012, largely as a result of the $15.8 billion acquisition of Petrohawk Energy Corporation in August 2011.

FY 2012 earnings before non-recurring items are expected to be lower than FY 2011 due to weakening mineral commodity and natural gas prices. Most commodity prices softened in late 2011, and are expected to remain lower for at least the first half of 2012, due to the slowing of growth in China and continuing uncertainties related to economic growth rates in Europe and the United States. Production volumes are expected to increase particularly due to the acquisition shale gas assets in the U.S., the completion of organic growth projects and more normal production levels at Queensland coal operations hit hard by floods in FY 2011.

BHP Billiton has been ramping up its sustaining, organic growth and exploration capital expenditures in the first half of 2012. As well, the Group’s capex program is estimated to be $68 billion for the FY2012 to FY2015 period ($20 billion for FY2012). In addition, further acquisitions are a distinct possibility. As a result, BHP Billiton faces not only project development risks, such as cost overruns, regulatory delays and environmental liabilities, but also demand for funds potentially beyond operating cash flow in the face of any downturn in commodity prices.

Despite its many strengths, BHP Billiton remains a commodity producer, subject to often volatile commodity prices. With plans to maintain a high level of capital expenditures through FY2015, the Company will have to be prudent in the funding of its discretionary shareholder payments and acquisition activity to preserve its current balance sheet health.

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

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.