Investors shrug off infrastructure woes
Arunaway train was derailed after travelling 57 miles across Western Australia without a driver. A fire ripped through a nickel smelter further south in the state, causing A$10 million ($10.4m) worth of damage.
A boiler tube failure shut an acid smelter in South Australia, and an electrowinning plant burst into flames in Chile.
For FTSE 100 miner BHP Group — once known as Broken Hill Proprietary — it seems it is the infrastructure that is now getting broken.
On Tuesday, BHP reported the negative financial impact of these four “outages” — A$835m — as well as the need to build “nuclear levels of safety” into ore-mine tailings dams after a second fatal breach at a Vale mine in Brazil.
But its share price registered barely a tremor. It seems investors were forewarned of the failings, and focused on two other structures — BHP’s capital allocation framework, and boss Andrew Mackenzie’s Swiss watch mechanism.
Last month’s operational report had braced the market for bad news on productivity.
It had warned that three of BHP’s four outages would have a negative impact on productivity of about A$600m. When the impact of all four was recorded in the half-year results as A$835m, but the net effect reduced to a negative A$460m offset by inventory build up and record volumes, analysts were unmoved — even by A$1 billion of targeted productivity gains being given up. “We had expected the company could miss this target. The underlying result was impacted, as expected, by a challenging operational period,” they all said.
It seems they were instead looking at the strength of second-half forecasts and a 2016 edifice — the capital allocation framework that BHP now uses to determine how cash flows back into the business, into debt reduction and into shareholder pockets.
It is a structure that appears to be working well. Free cash flow was better than RPC analysts had forecast thanks to fewer working capital impacts, lower cash interest charges, and slightly less capital expenditure. Debt was reduced from A$15.4b six months ago to below a targeted A$10b-$15b range.
Shareholder dividends could therefore be lifted from the minimum 50 per cent of earnings, to 75 per cent. Adding in share buybacks and a special dividend, total returns announced in the past six months reached A$13.2b.
Future returns, however, will depend on Mackenzie having BHP’s operations mimic a smaller structure — the Swiss watch mechanism he cited on Tuesday. He is relying on technology and better processes to take further outages out of the system. But he faces challenges. BHP’s Samarco joint venture with Vale is still closed after its own tailings dam disaster. It can only restart if it is totally safe — at those “nuclear” levels — and refinanced. Mackenzie’s watch hands may adjust in both directions but the miner cannot go back to the old ways.
Dispute resolved?
Refuelling a plane in mid air, by connecting a probe to a hose trailed by a flying tanker, was described by one Royal Air Force pilot as being about as easy as “sticking wet spaghetti up a cat’s arse”. But he and his colleagues did manage it 17 times on a daring bombing raid to the Falklands. Cobham, the FTSE 250 defence group, will be familiar with the technical difficulties. It has now taken almost two extra years — and £350m ($665.4m) of exceptional charges — to help build a replacement for those old tankers.
This week Cobham sought to draw a line under its longrunning dispute with project partner Boeing over the cost of delay. In July, the UK group’s shares plunged after it revealed Boeing had withheld payments and sought “unquantified damages”. Now, Cobham has quantified the damage — another £160m in exceptional charges to settle the dispute and cover costs on top of £40m last year and £150m in 2017. Analysts at Investec agreed the deal finally “draws a line”.
As Cobham admits: “The stringent terms of the original KC-46 contract remain in place”. It means Boeing can come back for more money if there are further delays so Cobham’s final exposure will not be known for sure until 2020.