End of the Boom: In Words and Pictures

Tuesday, 23rd February, 2016
Melbourne, Australia
By Kris Sayce

  • Billions gone
  • Get off our bandwagon
  • Coming soon

Everything you need to know about the state of the Aussie mining sector is in this one quote from Bloomberg:

BHP Billiton Ltd. made a larger-than-expected cut to its dividend, lowering the payout for the first time in 15 years, as the world’s biggest mining company seeks to protect its balance sheet and credit ratings amid a price collapse that saw first-half profits tumble 92 percent.

Well, it’s not quite everything. The first paragraph is really just the preamble. It’s the second paragraph here that delivers the punchline:

Underlying profit fell to $412 million at its continuing operations in the six months to Dec. 31, from $4.9 billion a year earlier, Melbourne-based BHP said Tuesday in a statement. Its first-half dividend was cut to 16 cents from 62 cents a year earlier and the company said it will adopt a policy to provide payouts at a minimum of 50 percent of underlying attributable profit. The payout had been forecast to drop to 31 cents, according to Bloomberg data.

For several months, we’ve used the BHP Billiton Ltd [ASX:BHP] price chart to illustrate the final end of the resources boom. You can see why by checking out the chart below:

Source: Bloomberg

Even after the recent rally, BHP shares are trading at 2005 prices. That’s lower than the low in 2008.

To put that in context, between 2005 and 2015, BHP made profits from continuing operations totalling US$137.3 billion.

For the six months ending 31 December, BHP’s profit was just $412 million.

What a fall from grace.

But check out the red spikes under the price chart. This shows you the daily value of shares traded. These spikes peaked lead up to the peaks of the booms in 2007 and 2011.

The interesting thing to note is how the value traded has gradually decreased since 2011. Ordinarily, you might expect the value traded to remain somewhat constant over time.

As the share price increases, the value traded stays the same as investors typically buy lots dependent on the value of the trade rather than the number of shares.

For instance, most investors would buy $5,000 or $10,000 lots, regardless of whether the share price is $10, $20 or $30.

You can see this on the charts below. First for Commonwealth Bank of Australia [ASX:CBA]:

Source: Bloomberg

Second, for Telstra Ltd [ASX:TLS]:

Source: Bloomberg

The share prices of Telstra and Commonwealth Bank have certainly risen and fallen over the past 15 years. But it would be hard to argue that each was subject to a frenzy of buying — not to the level of BHP during the resources boom.

But anyway, it’s all over now.

BHP’s cumulative profits of US$137.3 billion may still be out there somewhere. Only US$6.7 billion of it remains on the company’s balance sheet as cash. A lot of the rest, thankfully, ended up in the pockets of shareholders — but what they did with it is anyone’s guess.

Reinvested it back into the mining boom, probably!

Regretfully, some of it ended up being invested in ‘assets’ such as the Eagle Ford shale play, where last year BHP wrote down US$2.8 billion-worth of assets.

And last month, BHP announced it would write down it’s shale oil and gas assets even further. As the ABC reported:

BHP Billiton is set to take a $10.3 billion write-down on its US shale oil and gas assets, following a plunge in energy prices over the past year-and-a-half.

The diversified mining giant said in a statement to the share market that it will book an impairment charge of approximately $US7.2 billion ($10.3 billion) in its next half-yearly accounts, due out in February.

And so, that’s what BHP did. Only it went one better, it wrote down assets by US$8.4 billion.

What’s a billion between friends?

This is no small point. And it’s not just an accounting anomaly either. By writing down the value of an asset, the company is admitting that an asset that was worth this amount is now only worth that amount.

Think of it in the context of a car that’s a ‘write off’. Before the accident, your car may have been worth $20,000. But after the accident, it’s worth no more than $500 in scrap value.

That’s a meaningful loss, especially if you aren’t insured. You could have sold the car for $20,000 and used the cash for something else. But now you can’t.

In the context of BHP’s write downs, it’s saying that the value of its assets is significantly less than they were before. It means they couldn’t get a higher price if they wanted to sell, or it means the cash flows it generates from these assets may not be as big as previously expected.

As we’ve pointed out before, the BHP share price chart was the visual illustration of the end of the mining boom, now we have the results that confirm it’s true.

Markets

But don’t be sad, the markets are up — some of them anyway.

Overnight, the Dow Jones Industrial Average gained 228 points, or 1.4%.

The S&P 500 index closed up 1.5%.

In Europe, it seems the markets couldn’t care one way or the other about ‘Brexit’. The FTSE 100 closed 1.5% higher.

Germany’s DAX index ended the day up 2%.

In Asia, at the time of writing, China’s Shanghai Composite index is down 1.3%, and the Aussie S&P/ASX 200 closed down 21 points, or 0.4%.

Get off our bandwagon

Tsk! Celebrities are such bandwagon jumpers. The Financial Times reports:

In January, British actor Eddie Redmayne made headlines around the world as he became the latest in a growing band of smartphone refuseniks.

“It was a reaction against being glued permanently to my iPhone during waking hours,” he explained, turning instead to an old-fashioned “dumb phone” handset that could only make and take calls.

He is not alone. There is a small but busy market for phones that are simple and cheap at a time when smartphones are becoming ever more complex and expensive.

Whatever. If Redmayne is going to eschew smartphones, he should go the whole hog.

Long-time readers will recall that your editor (that’s me folks) has never even owned a smartphone, let alone ‘given one up’.

In fact, your editor (me again) doesn’t even own a ‘dumb phone’ — take that Redmayne. Our last dalliance with any kind of mobile phoning device (some old Nokia thing, 3210 perhaps, who cares?) was probably around six years ago.

Whenever it was, it was so long ago that we don’t remember. And because we never had an addiction to using a mobile phone, unlike an alcoholic, we don’t remember the last time we partook of the device.

But even without ever having owned a smartphone, we’re fully aware of their addictive qualities. As a father of two teenagers, we know it all too well.

To drag a smartphone user away from their handset even for a short time seems to be akin to denying an addict of their precious ‘hit’.

But we can understand why some folks are turning away from smart devices. One reason is their addictive qualities. It’s impossible to put them down, or not look at them; ‘Maybe if I look at my Facebook page one more time…’

But then there’s the security aspect too. It was perhaps ironic when Apple Inc [NASDAQ:AAPL] said it wouldn’t cooperate with the US government on hacking a terrorists’ iPhone.

Ironic because thanks to firms like Apple and Samsung, and the proliferation of social media websites like Twitter and Facebook, people today are more prepared than ever before to reveal almost every secret about themselves. And through them, to the world.

That Apple (whose decision to obstruct the government we applaud by the way) says that it wants to protect users’ privacy, is somewhat laughable.

But, as we’ve long said, we’re far more comfortable with private companies spying on individuals than we are with governments spying on individuals.

We think of it this way. What’s the worst thing that Apple or Google can do with your data? Try to sell you something perhaps. What’s the worst thing a government can do with your data? For governments there are no limits.

Coming soon

Our resident tech expert, Sam Volkering, has been all over the online security industry for years.

He’s currently putting together some vital information on the subject that should interest you. We’ll let you know when it’s ready.

Stay tuned.

Cheers,
Kris


End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 18 stocks, including Hunter Hall International Ltd [ASX:HHL], UGL Ltd [ASX:UGL], and The Reject Shop Ltd [ASX:TRS].

52-week lows: 24 stocks, including Collection House Ltd [ASX:CLH], LogiCamms Ltd [ASX:LCM], SMS Management & Technology Ltd [ASX:SMX], and Wingara Ag Ltd [ASX:WNR].

Note: The stocks listed above are stocks that hit an intra-day 52-week high during today’s trading. The stocks didn’t necessarily close at the 52-week high.