Updates: BHP’s Caution, Goodman Fielder Upbeat

We had two very different outlooks from companies at opposite ends of the current corporate ladder in Australia.

One the one hand we had the very profitable and successful BHP Billiton and its AGM for Australian shareholders where a more cautious resources giant was revealed than even a month ago.

At the other end we had struggling loss-making Goodman Fielder with a strategy update that was upbeat, more so than you would have thought a month or two ago.

Before the meeting BHP showed its strength by revealing that it had raised $US3 billion on global capital markets at a cost significantly lower than many countries pay, such as Italy and Spain.

And it revealed two decisions to invest well over $1.1 billion in new facilities in its WA iron ore business.

The BHP meeting was in Melbourne and shareholders heard that the company's management has become more wary on the outlook for commodity markets, as the eurozone crisis intensifies, hitting banks and credit markets.

The company warned that some customers were starting to face tighter access to trade finance and some were cutting production.

For example, Chinese steel production in October was the lowest since February, despite a solid month of iron ore imports.

Steel producers in Japan and South Korea are also trimming output as is the world's biggest steelmaker, ArecelorMittal.

"The heightened volatility and uncertain economic outlook are expected to continue to weigh on sentiment in the markets for our commodities," CEO, Marius Kloppers told shareholders.

The comments say BHP shares rise 47c to $37.12 after being weaker in early trading.

Mr Kloppers was more cautious than at the group's UK shareholder meeting in London last month, where he said prices had softened in the face of global uncertainty.

He reiterated yesterday that customers had raised their cautious approach to managing their stocks.

"Despite these challenges, we continue to be able to sell all that we produce and our counterparties continue to perform to contracted volumes," Chief Executive Marius Kloppers told shareholders.

"We are also aware that for some of the people we do business with, there has been tightening in both the availability of trade finance and the terms on which it can be accessed," he said.

After delivering a record $US21.7 billion profit in the past financial year, investors have been wanting BHP to buy back more shares, following a $US10 billion share buyback completed earlier this year.

The company has said it would consider buybacks alongside potential acquisitions and its plans to spend $US80 billion in the five years to 2015 to expand iron ore, coal, copper, uranium and natural gas production.

BHP earned a record $US21.7 billion in the June 30 year and analysts have the company earning around $US23 billion or so in the 2012 year, but given the slump in copper, iron ore and coal prices in the past two months, that forecast could already be too high.

Underlining the fact that the more cautious view of the global economy was short-term, Mr Kloppers said BHP has not changed its longer term outlook.

He said the rapid industrialisation and urbanisation of the developing world is the beginning of a structural shift in the global economy that will last for many decades.

"Therefore, notwithstanding the current challenges for the global economy, we expect the influence of developing nations to become more pronounced as their economies contribute a greater proportion of global GDP,'' he said.

"Against this backdrop, the future long-term demand for our products will remain strong.

And three separate announcements in the past couple of days underlined the company's longer term outlook.

Yesterday BHP said it had raised a total of $US3 billion in new debt (to replace short term commercial paper), at rates ranging from 1.125% for $US1 billion of four year notes, up to $US1.25 billion of 10 year bonds with an interest rate of 3.250% (which makes BHP a better credit risk than many countries, especially Italy and Spain).

The company also revealed plans to spend more than half a billion dollars on a new power station at its Mount Newman iron ore mining complex in WA.

The Yarnima Power Station will start producing power in 2014 and will secure future power supply for its Western Australia iron ore mining operations in the Pilbara.

BHP Billiton will build, own, and operate the combined cycle gas turbine (CCGT) power station, to be located in Newman, which will deliver 190 megawatts to replace supply from the existing Newman Power Station. The capital cost of the project is expected to be US$597 million (BHP Billiton share US$507 million).

And still in the iron ore province, the company has also approved a $US698 million ($A688 million) investment to develop its Orebody 24 iron ore mine near Newman in Western Australia.

"Orebody 24 is a small satellite mine to the massive Mt Whaleback operation, which was established in 1968 and is the biggest single-pit open-cut iron ore mine in the world at more than 5km long and nearly 1.5 kilometre wide. It will have the capacity to produce 17 million tonnes of iron ore a year and is due to start producing in a year's time.

The joint venture partners are Itochu Minerals & Energy, Mitsui-Itochu Iron and Mitsui Iron Ore. The full development cost is $US822 million, with BHP Billiton's share being $US698 million.

In contrast to the caution at the BHP meeting, the upbeat nature of Thursday's strategic briefing from Goodman Fielder's newish CEO, Chris Delaney, was at odds with the company's lacklustre performance.

The company lost money in the June 30 year thanks to asset write-downs here and in NZ totalling $300 million, while underlying profitability fell as the company's management and board went to sleep and failed to spot problems in its key baking business.

But the message yesterday from the briefing was one of a steadying of the business, cost cuts, possible asset sales and of course, the return to improved profits.

Those longer term Goodman Fielder shareholders would have heard this message at least twice in the last 8 years or so.

One of the messages from the briefing was that the company says it will once again consider selling its commercial milling and oils businesses under a restructure aimed at returning it to profitability.

It tried and failed to do that in 2009-10 when the buyer, Cargill, the giant US owned agri-business was rejected by the ACCC because of competition problems.

The strategic review was started by Mr Delaney and the board after the surprise June full year loss of $166.7 million.

So far, it has found $100 million in ongoing savings, according to a statement from the company yesterday.

Mr Delaney said that $40 million of savings have already been implemented, another $25 million in savings are expected to be realised in the 2013 and 2014 financial years, and $35 million in 2014 and 2015.

"We have determined that our retail businesses are our portfolio priority and therefore our commercial milling and oils businesses, although attractive and well performing, are considered to be non-core," he said in the statement.

Options such as sales are being explored for these non-core businesses, Mr Delaney said.

The milling business is based in New Zealand, and supplies flour to commercial customers, while the Integro business provides edible fats and oils to Australian and New Zealand manufacturers and wholesalers.

Other smaller businesses, such as meat and convenience meals in New Zealand, dips, biscuits and frozen pastry, are also under review.

Brands identified as important to the group in the review include Helga's, Vogel's, MeadowLea and Meadow Fresh, Wonder White, Praise and White Wings.

"As a first step in group structure renewal we have consolidated our three retail divisions in New Zealand into one integrated team to provide one face to our customers and to enhance efficiency.

"Work is well advanced on the analysis of the benefits of adopting a similar business model in Australia.

"Our manufacturing and supply chain will be optimised and work is advancing on the development of a new Baking business model with potential efficiencies and cost savings already identified," Mr Delaney said.

"The Strategic Review also identified the opportunity to consolidate our manufacturing base in Integro and Baking and eliminate unused capacity through proposed plant closures in Bunbury, Western Australia and in Rotorua, New Zealand.

"We have also recently taken action to significantly strengthen our balance sheet, including the successful execution of a $259 million capital raising and a new $500 million bank refinancing facility.

"This will provide the company with increased headroom within our financing facilities and give sufficient flexibility to enable us to pursue value accretive initiatives," Mr Delaney said.

"The next bank syndicate refinancing is not required until financial year 2014. As well the company has strengthened its top leadership team with four key new appointments."

Despite the continuation of a challenging external environment the company says the business is beginning to stabilise due to the strengthening of fundamentals in Baking and the impact of cost savings programs enacted in the first quarter.

"We can provide no specific guidance due to the volatility that exists in the market and because our recovery plans are still at an early stage," Mr Delaney said.

"I believe that in the last four months we have made good progress in setting the foundations for turning around the company's performance. However we are still a long way from where we need to be.

"We have early indications that the trends are beginning to turn more positively but we still have much hard work in front of us to achieve an acceptable performance for our shareholders.

"I look forward to updating the market on our progress in February at the release of our half year results."

One of the possible changes in the bread division that has not been implemented was to try and get Woolworths, Coles and Metcash IGA to accept bread deliveries to their huge distribution centres and then send the bread to their supermarkets.

The retailers knocked it back on cost grounds, (and the unstated reason that the bread from Goodman Fielder would no longer be 'fresh' or daily baked and delivered because the distribution trucks deliver every second or third day).

Other bread makers would have insisted on similar terms to help cut costs.

The big attraction for Goodman and Mr Delaney was cutting back the company's extensive bread distribution system which is costly and a logistics nightmare. The savings would have been significant.