Liquidity and capital resources
3.7 Liquidity and capital resources
As a result of our record production volumes and record prices in many of our key commodities over the past several years, we have generated very strong cash flows throughout our operations. These cash flows have been fundamental to our ability to internally fund our existing operations, maintain a pipeline of 28 growth projects, and return capital to shareholders through dividends and share buy-backs. Our priority for cash is to reinvest in the business. In line with our strategy, we have grown our business rapidly and consistently through project developments and acquisitions. Through a combination of borrowings and payments to shareholders, we manage our balance sheet with the goal of maintaining levels of gearing that we believe optimise our costs of capital and return on capital employed.
Net operating cash flows are our principal source of cash. We also raise cash from debt financing to manage temporary fluctuations in liquidity arrangements and to refinance existing debt. Our liquidity position is supported by our strong and stable credit rating and committed debt facilities.
3.7.1 Cash flow analysis
A full consolidated cash flow statement is contained in the financial statements. The explanatory notes appear in note 30 ‘Notes to the consolidated cash flow statement’ in the financial statements. A summary table has been presented below to show the key sources and uses of cash.
| 2008 US$M | 2007 US$M | 2006 US$M | |
|---|---|---|---|
| Net operating cash flows | 18,159 | 15,957 | 11,325 |
| Cash outflows from investing activities | (9,244) | (8,691) | (7,243) |
| Net proceeds from investing activities | 180 | 378 | 1,100 |
| Net investing cash flows | (9,064) | (8,313) | (6,143) |
| Net proceeds from/(repayment of) interest bearing liabilities | (750) | 1,614 | (1,245) |
| Share buy-back | (3,115) | (5,741) | (2,028) |
| Dividends paid | (3,250) | (2,339) | (2,126) |
| Other financing activities | (226) | (143) | (153) |
| Net financing cash flows | (7,341) | (6,609) | (5,552) |
| Net increase/(decrease) in cash and cash equivalents | 1,754 | 1,035 | (370) |
Year ended 30 June 2008 compared with year ended 30 June 2007
Net operating cash flow after interest and tax increased by 13.8 per cent to US$18.2 billion. Higher profits increased cash generated from operating activities, offset by an increase in working capital (principally due to higher prices) and increased taxation payments.
Capital and exploration expenditure totalled US$8.9 billion for FY2008. Expenditure on major growth projects was US$5.3 billion, including US$1.6 billion on petroleum projects and US$3.8 billion on minerals projects. Capital expenditure on maintenance, sustaining and minor capital items was US$2.2 billion. Exploration expenditure was US$1.4 billion, including US$0.5 billion which has been capitalised.
Financing cash flows include US$6.3 billion in relation to the capital management program and increased dividend payments.
Year ended 30 June 2007 compared with year ended 30 June 2006
Net operating cash flow after interest and tax increased by 40.9 per cent to US$16.0 billion. Higher profits increased cash generated from operating activities, offset by an increase in working capital (principally due to higher prices) and increased taxation payments.
Capital and exploration expenditure totalled US$7.9 billion for FY2007. Expenditure on major growth projects was US$5.5 billion, including US$1.7 billion on petroleum projects and US$3.8 billion on minerals projects. Other capital expenditure on maintenance, sustaining and minor capital items was US$1.6 billion. Exploration expenditure was approximately US$800 million, including US$265 million, which has been capitalised. Other investing cash flows included the purchase of interests in the Genghis Khan oil field, and the Guinea Alumina project.
Financing cash flows include US$8.0 billion in relation to the capital management program and dividend payments.
3.7.2 Growth projects
We continue to invest substantially in our future. Our project pipeline focuses on high-margin opportunities that are expected to create significant future value. We have 28 projects in either execution or feasibility, which represents an expected capital investment of US$24.8 billion. We also have other medium-term growth options with expected capital commitments in excess of US$90 billion.
During the 2008 financial year we completed 10 major growth projects. In addition, Neptune (oil and gas) delivered first production on 6 July 2008.
| Customer Sector Group | Project | Capacity (4) | Capital expenditure (US$M) (4) | Date of initial production (1) | ||
|---|---|---|---|---|---|---|
| Budget | Actual | Target | Actual | |||
| Base Metals | Pinto Valley(US) BHP Billiton — 100% | 70,000 tonnes per annum of copper in concentrate | 140 | 144 | Q4 2007 | Q4 2007 |
| Petroleum | Atlantis South(US) BHP Billiton — 44% | 200,000 barrels of oil and 180 million cubic feet of gas per day (100%) | 1,630(3) | 1,630(2) | H2 2007(3) | H2 2007 |
| Stybarrow(Australia) BHP Billiton — 50% | 80,000 barrels of oil per day (100%) | 380 | 389 | Q1 2008 | Q4 2007 | |
| Genghis Khan(US) BHP Billiton — 44% | 55,000 barrels of oil per day (100%) | 365 | 365(2) | H2 2007 | H2 2007 | |
| Neptune(US)BHP Billiton — 35% | 50,000 barrels of oil and 50 million cubic feet of gas per day (100%) | 405(3) | 418 | Q1 2008 | Q3 2008 | |
| Iron Ore | WA Iron Ore Rapid Growth Project 3(Australia) BHP Billiton — 85% | 20 million tonnes per annum of iron ore (100%) | 1,300 | 1,300(2) | Q4 2007 | Q4 2007 |
| Samarco(Brazil)BHP Billiton — 50% | 7.6 million tonnes per annum of iron pellets (100%) | 590 | 740(2) | H1 2008 | H1 2008 | |
| Stainless Steel Materials | Ravensthorpe Nickel(Australia) BHP Billiton — 100% | Up to 50,000 tonnes per annum of contained nickel in concentrate | 2,200(3) | 2,086 | Q1 2008(3) | Q4 2007 |
| Yabulu Extension(Australia) BHP Billiton — 100% | 45,000 tonnes per annum of nickel | 556(3) | 580 | Q1 2008(3) | Q1 2008 | |
| Cliffs (Australia) BHP Billiton — 100% | 360,000 tonnes per annum nickel ore | 139 | 139(2) | H1 2008(3) | H1 2008 | |
| Diamonds and Specialty Products | Koala Underground (Canada) BHP Billiton — 80% | 3,300 tonnes per day of ore processed (100%) | 200 | 176 | End 2007 | End 2007 |
| 7,905 | 7,967 | |||||
- References to quarters and half-years are based on calendar years.
- Number subject to finalisation. For projects where capital expenditure is required after initial production, the costs represent the estimated total capital expenditure.
- As per revised budget or schedule.
- All references to capital expenditure and capacity are BHP Billiton’s share unless noted otherwise.
| Customer Sector Group | Project | Capacity (1) | Budgeted capital expenditure (US$M) (1) | Target date for initial production (2) |
|---|---|---|---|---|
| Petroleum | North West Shelf 5th Train(Australia) BHP Billiton — 16.67% | LNG processing capacity 4.2 million tonnes per annum (100%) | 350 | Late 2008 |
| North West Shelf Angel (Australia) BHP Billiton — 16.67% | 800 million cubic feet of gas per day and 50,000 barrels of condensate per day (100%) | 200 | End 2008 | |
| Shenzi (US) BHP Billiton — 44% | 100,000 barrels of oil and 50 million cubic feet of gas per day (100%) | 1,940 | Mid 2009 | |
| Pyrenees (Australia) BHP Billiton — 71.43% | 96,000 barrels of oil and 60 million cubic feet gas per day (100%) | 1,200 | H1 2010 | |
| Aluminium | Alumar Refinery Expansion (Brazil) BHP Billiton — 36% (3) | 2 million tonnes per annum of alumina (100%) | 725 | Q2 2009 |
| Iron Ore | WA Iron Ore Rapid Growth Project 4 (Australia) BHP Billiton — 86.2% | 26 million tonnes per annum of iron ore (100%) | 1,850 | H1 2010 |
| 6,265 | ||||
- All references to capital expenditure and capacity are BHP Billiton’s share unless noted otherwise.
- References to quarters and half-years are based on calendar years.
- Schedule and budget are under review following advice from the Operator.
| Customer Sector Group | Project | Capacity (1) | Budgeted capital expenditure (US$M) (1) | Target date for initial production (2) |
|---|---|---|---|---|
| Petroleum | Bass Strait Kipper (Australia) BHP Billiton — 32.5% - 50% | 10,000 bpd condensate and processing capacity of 80 million cubic feet gas per day (100%) | 500 | 2011 |
| Bass Strait Turrum (Australia) BHP Billiton — 50% | 11,000 bpd condensate and processing capacity of 200 million cubic feet gas per day (100%) | 625 | 2011 | |
| North West Shelf North Rankin B (Australia) BHP Billiton — 16.67% | 2,500 million cubic feet gas per day (100%) | 850 | 2012 | |
| Aluminium | Worsley Efficiency and Growth (Australia) BHP Billiton — 86% | 1.1 million tonnes per annum (100%) | 1,900 | H1 2011 |
| Manganese | GEMCO (Australia) BHP Billiton — 60% | 1 million tonnes per annum manganese concentrate (100%) | 110 | H1 2009 |
| Energy Coal | Klipspruit (South Africa) BHP Billiton — 100% | 1.8 million tonnes per annum export coal. 2.1 million tonnes per annum domestic | 450 | H2 2009 |
| Douglas-Middelburg Optimisation (South Africa) BHP Billiton — 100% | 10 million tonnes per annum export thermal coal and 8.5 million tonnes per annum domestic thermal coal (sustains current output) | 975 | Mid 2010 | |
| Newcastle Third Export Coal Terminal (Australia) BHP Billiton — 35.5% | Third coal berth, 30 million tonnes per annum (100%) | 390 | Late 2010 | |
| 5,800 | ||||
- All references to capital expenditure and capacity are BHP Billiton’s share unless noted otherwise.
- References to half-years and years are based on calendar years.
In addition to the above projects the Board approved pre-expenditure of US$930 million for Rapid Growth Project 5 (Western Australia Iron Ore).
3.7.3 Net debt and sources of liquidity
Our policies on debt and treasury management are as follows:
- commitment to a solid ‘A’ credit rating
- cash flow positive before dividends, debt service and capital management, excluding cash effects of major acquisitions
- target a minimum interest cover ratio of eight times over the commodity cycle
- maintain net gearing (net debt/net debt + net assets) of 35 per cent to 40 per cent
- flexibility from diversification of funding sources
- generally maintain borrowings and excess cash in US dollars
Solid ‘A’ credit ratings
The Group’s credit ratings are currently A1/P-1 (Moody’s) and A+/A-1 (Standard & Poor’s). There has been no change to these ratings during the year, however the ratings were placed on negative outlook following the announcement of proposed offers for Rio Tinto plc and Rio Tinto Limited.
Interest rate risk
Interest rate risk on our outstanding borrowings and investments is managed as part of the Portfolio Risk Management Strategy. Refer to note 26 ‘Financial risk management’ in the financial statements for a detailed discussion on the strategy. When required under this strategy, we use interest rate swaps, including cross currency interest rate swaps, to convert a fixed rate exposure to a floating rate exposure. All interest swaps have been designated and are effective as hedging instruments under IFRS.
Net gearing and net debt
30 June 2008 compared with 30 June 2007
Net debt, comprising cash and interest bearing liabilities, was US$8.5 billion, a decrease of US$1.5 billion, or 15.2 per cent, compared to 30 June 2007. Gearing, which is the ratio of net debt to net debt plus net assets, was 17.8 per cent at 30 June 2008, compared with 25.0 per cent at 30 June 2007.
Cash at bank and in hand less overdrafts at 30 June 2008 was US$4,173 million compared with US$2,398 million at 30 June 2007. In addition, we had money market deposits at 30 June 2008 of US$2,462 million compared with US$1,467 million at 30 June 2007.
30 June 2007 compared with 30 June 2006
Net debt, comprising cash and interest bearing liabilities, was US$10.0 billion, an increase of US$0.8 billion, or 8.7 per cent, compared to 30 June 2006. Gearing, which is the ratio of net debt to net debt plus net assets, was 25.3 per cent at 30 June 2007 compared with 27.2 per cent at 30 June 2006.
Cash at bank and in hand less overdrafts at 30 June 2007 was US$2,398 million compared with US$1,351 million at 30 June 2006. In addition, we had money market deposits at 30 June 2007 of US$1,467 million compared with US$536 million at 30 June 2006.
Funding sources
The maturity profile of our debt obligations is set forth in note 26 ‘Financial risk management’ in the financial statements. The following table sets forth the details of our undrawn committed facilities as at 30 June 2008 and 2007.
| Facility | Facility | |||||
|---|---|---|---|---|---|---|
| available 2008 US$M | Used 2008 US$M | Unused 2008 US$M | available 2007 US$M | Used 2007 US$M | Unused 2007 US$M | |
| Acquisition finance facility | 55,000 | — | 55,000 | — | — | — |
| Revolving credit facility | 3,000 | — | 3,000 | 3,000 | — | 3,000 |
| Other facilities | 60 | — | 60 | 58 | — | 58 |
| Total financing facilities | 58,060 | — | 58,060 | 3,058 | — | 3,058 |
The Group’s US$3.0 billion multi-currency revolving credit facility, established in October 2006, matures in October 2011. As at 30 June 2008, this facility was undrawn. The interest rates under this facility are based on an interbank rate plus a margin. The applicable margin is typical for a credit facility extended to a company with our credit rating. A negative pledge applies to the credit facility.
In February 2008, we entered into a US$55 billion facility and subscription agreement to, among other things, meet potential funding requirements in relation to our offers for Rio Tinto. This facility is currently undrawn. The terms of the facility are summarised in section 2.13 ‘Material Contracts’.
Apart from the new facility and subscription agreement referred to above, none of our general borrowing facilities are subject to financial covenants. Certain specific financing facilities in relation to specific businesses are the subject of financial covenants that vary from facility to facility, but which would be considered normal for such facilities.
3.7.4 Quantitative and qualitative disclosures about market risk
We identified above in ‘Our business — external factors and trends affecting our results’ (section 3.4 in this Report) our primary market risks. A description of how we manage our market risks, including both quantitative and qualitative information about our market risk sensitive instruments outstanding at 30 June 2008, is contained in note 26 ‘Financial risk management’ to the financial statements.
3.7.5 Portfolio management
Our strategy is focused on long-life, low-cost, expandable assets and we continually review our portfolio to identify assets which do not fit this strategy. These activities continued during the period, with proceeds amounting to US$180 million being realised from divestments including the Elouera coal mine (Illawarra Coal Operation, Australia). Other disposals include mining leases at Poitrel (Queensland Coal, Australia) and Optimum Colliery (South Africa). Proceeds from the sale or distribution of our assets and interests since 2001 now surpass US$6 billion.
We will purchase interests in assets where they fit our strategy. During the year we announced an arrangement to acquire Anglo Potash Limited which was subsequently completed on 10 July 2008. In addition, on 17 July 2008 we announced that BHP Billiton Mitsubishi Alliance (BMA) had entered into a conditional agreement to acquire 100 per cent of the New Saraji Coal Project for a cash consideration of approximately US$2.4 billion (US$1.2 billion our share).
3.7.6 Dividend and capital management
On 18 August 2008, the Board declared a final dividend of 41.0 US cents per share. This rebased dividend represents a 51.9 per cent increase over last year’s final dividend of 27.0 US cents per share. This brings the total dividends for FY2008 to 70.0 US cents per share, an increase of 23.0 US cents per share, or 48.9 per cent, over last year and 150.0 per cent over the past three years. The Board’s declaration represents our thirteenth consecutive dividend increase and signals our confidence in the outlook and our ability to consistently deliver future earnings and cash flow. Our dividend has increased by more than 530 per cent since the interim dividend paid in FY2002. Our compound annual dividend growth rate has been 32.3 per cent over this period. We intend to continue with our progressive dividend policy from this new base, with further increases dependent upon the expectations for future market conditions and investment opportunities.
We continued to purchase shares under the previously announced US$13 billion buy back program. During the year, we repurchased and cancelled 96,904,086 BHP Billiton Plc shares, through on-market buy-backs, at an approximate average price of US$31.57 (A$36.46/GBP15.51). These shares were purchased via an independent third party under an irrevocable mandate. When the mandate expired on 14 December 2007, the buy-back program was suspended. At the time of the suspension, we had returned US$8.8 billion of the US$13 billion.
Since August 2004, we have announced capital management initiatives totalling US$17 billion. Since the first buy-back in 2004, 680 million shares have been repurchased, representing approximately 11 per cent of the total shares on issue at an approximate price of US$18.53 (A$23.25/GBP9.57).