Bouncy ride ahead for BHP Steel shareholders

By Peter V O'Brien

Friday 3rd May 2002

New Zealand shareholders in BHP Billiton who receive shares in BHP Steel after the latter's demerger from the parent should be prepared for considerable future earnings volatility.

Resource Group BHP Billiton has many New Zealand shareholders who will participate in BHP Steel on the expected basis of one share in the steel company for every five held in the parent.

Preliminary documents about demerger were released last week.

The proposal to demerge the steel company and list it separately on the Australian Stock Exchange was disclosed last year at the same time as the announcement of the proposed creation of BHP Billiton.

Draft forecast financial statements for BHP Steel were among the demerger arrangements issued last week.

A disclaimer accompanied the forecast, in the form of a warning it should not be considered as a recommendation in relation to holding, purchasing, or selling shares in BHP Billiton, BHP Billiton plc, BHP Steel or any other company "or to take or not to take any action."

The message that the forecasts were only indicative was reinforced in a reference that the final forecast would be included in documents assisting BHP Billiton shareholders to decide whether to approve the steel demerger.

Documents containing details of the demerger, a proposed capital reduction in BHP Billiton, schemes of arrangement and other matters will be released this month.

The current forecast was insufficient to make an informed assessment of the "assets and liabilities, financial position and performance, profits and losses and prospects of BHP Steel."

Another disclaimer came, in case the earlier message was overlooked: "None of BHP Billiton, BHP Steel nor their directors or officers nor the prospective directors of BHP Steel take any responsibility and disclaim all liability to any person who, notwithstanding the warnings contained in this statement not to do so, takes any action based on the attached forecast."

Point taken but the hedged-about forecast was still worth examination.

BHP Steel's pro forma historical revenue was $A4.94 billion for the year ended June 2001. It was forecast to decrease 9% in the 2002 year to $A4.49 billion and then increase 9% to $A4.91 million next year.

Earnings before interest and tax (ebit) were $A305 million in the June 2001 year on a pro forma historical basis.

The ebit forecast for the year ended June 2002 was $A167 million, a drop of 45.2% on the previous year. It was expected to rise to $A343 million in the following year.

That would be an increase of 105.4% on 2002 and 12.4% on 2001.

Actual figures for 2001 and the forecast for the current year omitted information below ebit but included it in relation to 2003.

That year was expected to produce $A254 million in profit attributable to shareholders.

The forecast financial information was based on several "key assumptions," which is usual in such cases.

They related mainly to likely prices for exports, particularly for hot-rolled coil steel, which the documents said were very sensitive.

The documents said BHP Steel's forecast net profit was also very sensitive to assumptions related to those prices.

Other assumptions were based on exports to the US not being subject to the US government's 30% tariff, average domestic steel selling prices, domestic and export sales volumes and sales from Asian-based facilities.

The company's likely profit volatility was emphasised in a sensitivity analysis that said international steel prices were volatile and difficult to forecast.

A sensitivity analysis for the hot-rolled coil-steel price said a $US25 a tonne plus or minus movement in the average price for that product added or subtracted $A104 million to or from BHP Steel's forecast ebit for the year ended June 2003.

The forecast average price for hot-rolled coil steel in that year was $US232 at tonne.

That meant a price variation of 10.8% a tonne had a 30.3% impact on ebit.

Other significant sensitivities were:

a plus/minus 2% movement in steel slab production in Australia and New Zealand had a plus/minus impact of $A14 million on ebit;

a plus/minus 1Ac movement in the $A/$US exchange rate equalled plus/minus $A10 million;

a plus/minus $US1 a tonne movement in coking coal costs was plus/minus $A7 million on ebit; and

a plus/minus $US1 a tonne movement in iron ore costs added or subtracted $A14 million to or from ebit.

BHP Billiton said care should be taken in interpreting the sensitivities. "The estimated impact of changes in each of the variables has been calculated in isolation from changes in other variables over the full year. In practice, changes in variables may offset each other or may be additive and it is likely that BHP Steel's management would respond to any adverse change in one variable by taking action to minimise the net effect on BHP Steel's earnings."

That passage summed up business management. World and local events affect price and sales volume trends; management moves to minimise the effects of the trends.

Shareholders in a standalone BHP Steel may have a bouncy ride.

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