BHP Billiton Limited and Related Industry - Case Study Example

Table of Contents 1.0.Executive Summary 1 2.0.BHP Billiton Limited and Related Industry 3 2.1.Company’s Core Business 3 3.0.Overview of BHP Billiton Limited Industry 4 4.0.Financial Structure and Funding at BHP Billiton Limited 6 5.0.Accounting Policies and Relevant Changes 7 1.0. Executive Summary The report succinctly presents general analysis of the business activity of BHP Billiton Limited. The Company is located in Australia as one of the corporate firms dealing in mining. As Anglo-Australian multinational mining, petroleum and metals company it is headquartered in Melbourne. The central focus of the Company is to develop long-term shareholder value which has been done through the acquisition, discovery, development and marketing of natural resources. This has been conceptualized through shared values and the continued endeavor to create long life but low cost assets diversified by their commodities, market and geography. These have been undertaken and such conceptualised through its laid platform, structure, financial reports and annual reports. This means the Company has been basing its business on ethical decision making or standards and principles that guide managers, individuals and work group behaviour in line with mining and terms of service in Australia. The report and analysis will be pegged on BHP Billiton Ltd’s annual report 2014 (as at 31 December 2014) but will be in tandem with annual report of 2013 ( as at December 2013) so as to make different financial comparisons. To underscore this, the report will be based on three elements. The first element is the core business of the Company within Australia. The second element is its financial performance for the period stated. Third will be the Company’s property and relevant accounting standards that will be assessed in accordance with the already generally acceptable accounting standards. Other issues that will be given consideration within the scope of accounting standards are the assets and liability and voluntary disclosures. 2.0. BHP Billiton Limited and Related Industry 2.1. Company’s Core Business BHP Billiton Limited is an Australian Company engaging in mining, metals and petroleum. The Company was established under the name BHP Limited and before it was known as The Broken Hill Proprietary Company Limited. In 1885, it was incorporated under the name The Broken Hill Proprietary Company Limited. BHP Billiton Limited has a well-defined core principle of operating model which include mandatory performance requirements, common planning and reporting and common design of the organization. On the other hand, the model is also designed to promote a scalable organization that is able to attain a sustainable growth in productivity by outlining transparency in performance and effort duplication elimination. As a group, the Company supports different operations in 26 countries with these regions working under a defined set of guidelines and accountabilities as authorized by its Group Management Committee. However, its primary locations are Singapore, London and Melbourne. As already noted, BHP Billiton Limited operates in 26 different countries and these have been aligned with five different business segments reflecting the commodities the Company extract and market. Consequently, these segments reflect the structure the Company is using to manage its asset performance. The table below lists these segments: Business Segment Principle Activity of the Segment Revenue from sales of goods (as at Dec 31st 2013) Copper Mining of copper, lead, zinc, silver, uranium, molybdenum and gold Total Revenue $ 13,868 Coal Mining of metallurgical coal and thermal coal (inform of energy) Total Revenue $ 9,115 Aluminium, Nickel and Manganese Mining of bauxite, refining of bauxite into alumina and smelting of alumina into aluminum metal Mining of manganese ore and production of manganese metal and alloys Mining and production of nickel products Total Revenue $ 8,411 Petroleum and Potash Exploration, development and production of oil and gas Potash development Total Revenue $ 14,833 Iron Ore Mining of iron ore Total Revenue $ 21,356 Source (BHP Billiton Limited Annual Report 2014) 3.0. Overview of BHP Billiton Limited Industry The Company operates in a mining industry driven by stiff competition from rival companies such Santos Limited. Additionally, the level of competition dictates the Company towards sustainable competitive advantage. The operational structure of the Company describes the extent of its operations. All these have been brought by economic, social, political and legislative environment under which it operates. Secondly, the demand for its products continue to escalate and comparing total revenue generated for 2013 ($65,968) financial year and that of 2014 ($67,206) as detailed above it is apparent that the demand for its products continues to grow. One major challenge facing the Company is the declining market conditions in countries such as Japan, China, United States and European Union. This has been coupled by decrease or decline in major commodity prices in already competitive global marketplace. Secondly, BHP Billiton Limited is facing stiff competition from companies such as Santos Limited. As a matter of fact, the report indicates that as at 31st December 2014, BHP Billiton Limited owned just 32.5 per cent interest in the Kipper Unit Joint Venture with companies such as Santos owning 35% of the stake and Esso Australia on the other hand owning about 32.6% (BHP Billiton Limited Annual Report, 2014). BHP Billiton Limited has been distinguished by highly competitive market. On the same breath, actors and competitors in the market have been seen to be struggling with the increasing cost of operation, production, development and mature market. It has to be recognized that any management analysis of the Company must first recognize the position of the Company. That is, the Company, in order to wade these levels of competitions it has continued to invest selectively and in particular, in projects that can meet their demanding criteria. In FY 2014 for instance, it is reported that the Company made a reduction on their share of exploration as well as capital expenditure by an estimated figure of US$15.2 billion. This strategy enabled the Company to increase internal competition but acted smart with regard to competitions from other rival companies. Additionally, this ultimately created efficiency in terms of capital and sustainable shareholder value. 4.0. Financial Structure and Funding at BHP Billiton Limited Beginning with the Company’s funding sources, in FY 2014; the Company issued a four tranche Global Bond that totaled US$5.00 billion. This was comprised of US$500 million 2.050 per cent Senior Notes due 2018, Global Bond totaling US$5.0 billion comprising US$500 million Senior Floating Rate Notes due 2016 paying interest at three-month US dollar LIBOR plus 25 basis points and US$2.5 billion 5.000 per cent Senior Notes due 2043. These funding sources suggest that the Company has given consideration to reinvestment of internally generated funds to future projects as well as existing projects in other countries. In tandem to the above funding sources, BHP Billiton Limited has elaborate financial structure indicating the position it holds in terms of operations. The Company had total liabilities of US$66,031 million as at 31st Dec. 2014. On the other hand, it had total assets of US$151,413 million as at the same trading period. This means that the debt ratio was (66,031/151,413) = 0.436. The interpretation of this is that there are over 41% of its assets under the management of debt and over 59% under equity. This is a healthy environment for the Company. However, it is necessary to compare this ratio with other competitors to ascertain cases of volatile earnings among other variables. Name of the Company Debt ratio Debt to Equity ratio BHP Billion Ltd 0.436 88% Woodside 0.431 65% Santos 0.441 53% Sources: (BHP Billion Ltd Annual Report 2014; Woodside Annual Report 2014; Santos Ltd Annual Report 2014) Based on the data as presented above, BHP Billion Ltd must have been successful in financing its debt as well as growth. The consequence of this is a volatile earning due to the already generated interest expense. Key elements of financial performance Elements 2014US$ 2013 US$ Trend Dividend 120cps 129pcs ↑9.3% Net profit after tax 15,224 12,820 ↑16% Sales revenue 67,206 65,953 ↑12.4% Net debt 85,382m 75,291m ↑ 12.3% Based on sales revenue, net profit after tax, dividend and net debt, there are different trends as shown in the table above. Taking a case of net debt for instance, there was 85,382M as reported in 2014 while in 2013; there was 75,291M which was an improvement of 12.3% as compared to the previous year. This is the trend in other financial performances. 5.0. Accounting Policies and Relevant Changes In accordance with AASB 119 Employee Benefits there is need for the recognition of some financial/accounting attributes such as the disclosure requirements to be improved, recognition of defined costs and disclosure requirements for benefit plans. A consideration has on employee has also been given consideration in the (1) AASB 119 Employee Benefits as recently revised. That is, there is now need to recognize both the short-term and long-term benefits of employees which should now be based on the anticipated timing of settlement instead of the entitlement as previously held. It therefore insinuate that the revised version will be tenable is thorough scrutiny is given consideration. On the other hand, there is need for the recognition of Fair Value Measurement as contained in AASB 13. In accordance with this provision the standard is now clear on the fair value thus bringing a unitary or single entity guideline that can be adopted for the measurement of fair value especially a given Standard is required. Lastly, there is Financial Instruments as contain in AASB 9. Unlike the previous clause AASB 139 that was not succinct on the financial instrument, this on the other hand explains what should be done with regard to Recognition and Measurement. In as much, it has to be noted that when there is conflict, there has been amendments coming from the issuance of AASB 9 but importantly, the Standard seeks to add the requirements for classifying as well as measuring liabilities arising from financial obligations. References BHP Billiton Ltd Annual Report 2014, viewed 12th August 2015. BHP Billiton Ltd Annual Report 2013, viewed 12th August 2015. Read More