BHP Billiton Mines Cash for Uncertain Future – Wall Street Journal

Aug. 16, 2016 7:24 a.m. ET

More often than not, something is easier said than done. That is especially true for mining giant BHP Billiton. BBL 0.63 %

The miner is trying to keep shareholders happy as it trudges through disasters and operational challenges. After recasting its progressive dividend policy in February, BHP said Tuesday it would return 30 cents a share for the year, down almost 80% from $ 1.24 last year, but only slightly less than expected. For the second half of the year, it sweetened its dividend by 6 cents on top of the minimum payout of 8 cents.

But that takes attention away from an earlier promise: meaningful debt reduction. The miner's free cash flow came in strong at $ 3.4 billion, but net debt has largely stayed flat at $ 26 billion. The balance sheet remains strong, but the burden of finance costs continues to weigh. For now, cash flow generation doesn't seem to be hindered by this. But it is only an uncertain commodity price rally that is giving BHP the room to balance dividends, debt and growth.

In an effort to keep free cash flow looking robust, capital expenditure has fallen dramatically, down 40% since last year and lower than the company's guidance in February this year. But investors should note, the miner now forecasts higher spending in fiscal 2018.

The miner Tuesday delivered some positive news to mask its worst-ever annual loss, tied to write-downs on its U.S. oil business and provisions for a fatal dam failure in Brazil: It planned to double cash flows to $ 7 billion next year. That's good news until you get to the caveat: "at current spot prices."

Perhaps more convincing would be a boost to cash flow from operational productivity. In similar stead, when Chief Executive Andrew Mackenzie unveiled a streamlined strategy in May, he said BHP's existing opportunities could increase their value by a lofty 70%. Again, this assumes commodity prices stay flat at best. Take, for instance, BHP's problem child, the onshore U.S. business. It needs oil prices to stay at about $ 50 a barrel to get growth going, according to UBS analysts.

BHP's stock surged in London to its highest level in nine months, and investors are rightly pleased to be at the top of the miner's priority list. But they should also keep an eye on whether BHP delivers on past promises.

Write to Anjani Trivedi at anjani.trivedi@wsj.com