Debt refinancing
BHP Billiton had net cash of $200 million in 2010, which quickly deteriorated to a net debt of $30.4 billion by the end of 2012. Its long-term debt currently aggregates to around $28.33 billion with annual interest expenses of $470 million. BHP Billiton Limited (ADR) (NYSE:BHP) will have around $2 billion-$4 billion of annual debt maturities till 2018, which are expected to dwindle down to around $1 billion each year henceforth.
With plunging earnings, inflationary pressures, and interest expenses eating up potential earnings, debt refinancing seems to be the only way out for BHP Billiton Limited (ADR) (NYSE:BHP) (at least for now). In April, the company raised $950 million from Europe (bonds) at 3.125% with a 20-year term as compared to its existing interest rate of 3.53% attached to its 15-year Australian bonds.
The company also raised $734 million this month by issuing 10-year bonds at an interest rate of 3.23%. As of now, these interest savings are not enough to root out its long-term debt problems, but taking advantage of low interest rates is always a wise choice.
Cutting down on expenses
Besides restructuring, financially troubled companies move towards cutting costs. Brazilian mining behemoth, Vale SA (ADR) (NYSE:VALE). has lost 26% of its market cap this year due to falling prices of industrial metals. The depreciating Brazilian Real is another major concern. Although Vale exports most of its iron ore, the depreciating currency has inflated its international debt which has been weighing upon the company. As a result, its net profit fell 18%. But, the results were better than expected as Vale SA (ADR) (NYSE:VALE) was able to save $3.6 billion in annual costs.
Rio Tinto plc (ADR) (NYSE:RIO) is another financially troubled mining company with its towering debt of $33 billion. To repay its liabilities and navigate through troubled times, management of Rio Tinto has come forth with a $5 billion worth of annual cost saving plan.
In a similar manner, BHP Billiton Limited (ADR) (NYSE:BHP) is also planning to save $1.9 billion in annual costs in FY14. Its capital and exploration expenditures would be reduced to $18 billion, which is an 18% reduction. Adding to the delight, management announced that its cost cuts would be deeper (and bigger) in the subsequent years, which presents an optimistic outlook for the company’s financials.
Divesting non-core assets
And lastly, BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO) would be selling their non-core assets in a bid to raise capital and focus on their core competencies. They have collective debt of over $60 billion, and their asset sale programs could fetch as much as $28 billion. Rio Tinto has announced that it would be selling its diamond mines, with little impact on its overall earnings. But Rio Tinto has been downgraded by most investment research firms, citing credit risk behind the downgrades. S&P has a negative outlook for Rio Tinto plc (ADR) (NYSE:RIO).
Talking about BHP Billiton, the company has divested around $5 billion worth of assets this year and sold its Pinto Valley mine for $650 million last month. Up till now, BHP Billiton has sold its diamond and uranium assets, and the company could be looking to sell its manganese, aluminium, and nickel assets as well.
As of now, the specifics of the pending asset divestment are unclear and predicting the impact of the sale would purely be speculation. But, the company seems to be on the road to recovery, which is why is has been attracting a lot of attention lately.
Wrap up
In my opinion, BHP Billiton Limited (ADR) (NYSE:BHP) is making all the right moves. Its debt maybe towering, but BHP Billiton has been navigating times like these since 1885. As a result of overall business restructuring and credit quality, analysts at Macquarie have upgraded BHP Billiton from neutral to outperform, and I couldn’t agree more.
The article This Giant Seems Well Positioned for a Turnaround originally appeared on Fool.com and is written by Piyush Arora.
Piyush Arora has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Piyush is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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