Chairman’s Review
The continuation of a strong global commodities market has resulted in another outstanding set of results for BHP Billiton.
Our underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were US$18.1 billion, our net operating cash flows increased to US$10.5 billion and our total dividend payment for the year was 36 US cents a share, reflecting the ninth consecutive increase in our dividend.
Our strongest earnings contributor was the Base Metals business, which generated a record US$5.4 billion in underlying earnings before interest and tax (underlying EBIT). The price of copper was a major influence on this result. While labour and other input costs continued to rise due to the tight supply and strong demand environment, our operating margins increased.
BHP Billiton’s market capitalisation increased further, to around US$118 billion, compared with US$95 billion this time last year. High spot commodity prices, particularly for the London Metal Exchange (LME)-linked commodities, resulted in strong cash flows during the year. This increased our ability to return capital to shareholders. However, we do not run the business based on short-term commodity prices, which can be highly volatile. We will continue to make disciplined decisions that we believe will increase the underlying value of the Company based on the long-term cash generation potential of our businesses and opportunities.
International Financial Reporting Standards (IFRS) became effective for BHP Billiton from 1 July 2005. This change has had limited impact on our reported profit and balance sheet, however, it has simplified the reporting of our financial results by enabling a single set of combined accounts to be produced for both BHP Billiton Limited and BHP Billiton Plc.
On the home page of this Review is a pyramid that contains the seven drivers that underpin BHP Billiton’s strategy. These strategic drivers combine to ensure that every decision made by the Board and the management team contributes to the delivery of shareholder value over the long term.
BHP Billiton has achieved the goals set at the time of the merger, including generating outstanding returns to shareholders, and we are now in a position to ‘raise the bar’ by resetting our aspirations.
We are striving to improve our strong competitive position in all of our chosen commodities. We strengthened our portfolio of assets with the integration of WMC Resources into our businesses during the year, and we believe we have unique opportunities and challenges as a result of the new industry environment, most importantly the potential for a multi-decade of high demand growth driven by China, India, Russia and the developing South American economies.
While the ultimate purpose of BHP Billiton is to maximise total return to shareholders over an extended time frame, our aspirations should also address and resonate with other stakeholder groups: customers, resource owners, communities and governments, partners, suppliers and our employees.
Corporate Governance
As we have reported in previous years, we believe that the right approach to corporate governance at BHP Billiton is to draw on best practice from all the jurisdictions in which we operate and are regulated.
We have developed our own framework of compliance to ensure that corporate governance does not simply become synonymous with a mandated system of rules based on a ‘tick a box’ system where shareholders, creditors and other corporate stakeholders might lower their guard to their own detriment.
No mandated system will address the fact that a fully compliant but dysfunctional board can create as much havoc as one that does not comply at all.
We believe that a board must find the right balance between monitoring the performance of the company and advising on strategy. That objective has led to the Board defining its role and what it expects of management in a Board Governance Document, which moves the emphasis from mere compliance to a practice of informed corporate governance in a modern business environment.
That said, irrespective of how well a board defines its role and its expectations, corporate behaviour is dictated above anything else by the ‘tone at the top’.
That ‘tone at the top’ is set by the Board and senior management, in particular the Chief Executive Officer. The tone forms the culture of the corporation and permeates the corporation’s relationships not only with investors, but also employees, customers, suppliers, local communities and governments.
Our Corporate Governance Statement is available to download. A summary of our compliance with our multi-jurisdictional obligations and our own internal control mechanisms is published on our website.
Our program of Board renewal continues, with Jacques Nasser and Paul Anderson having joined the Board in June. We are delighted to have secured the services of such highly respected, independent and experienced former executives.
My Board colleagues have again this year made a substantial contribution to the oversight of the Group’s business, strategy and people development, and I thank them for their commitment.
Corporate Responsibility
One of the seven strategic drivers for the Group, second only in the pyramid to People, is our Licence to Operate. Our Sustainability Report outlines in detail the programs and initiatives that support our commitment to positively impacting the communities and environments in which we operate.
At BHP Billiton, we believe that engaging with society as an active and self-motivated corporate citizen is sound business practice. Integrating sound principles governing safety, business conduct, social, environmental and economic activities is good both for competitive advantage and for developing a reputation as the partner of choice.
Outlook
The short-term global economic outlook remains positive. Growth in Asia will help drive the global economy, with Japan’s expansion now well-established and China’s economic growth expected to remain strong. The US economy is likely to remain solid.
However, while the short-term outlook is encouraging, it is not without risk. Escalating political tensions, contributing to a tight oil market, are adding to increased uncertainty in all markets.
Forward prices of LME metals and oil remain above long-term historical averages, indicating that large-scale supply surpluses are not being anticipated in these markets. Similarly, there is no sign of an imminent retreat in oil and bulk commodity prices.
Once again, I commend Chip Goodyear, his management team and all of BHP Billiton’s many thousands of employees and contractors for their continued commitment, which has enabled the Company to turn in another outstanding performance for the 2006 financial year.
Don Argus