Significant Issues Impacting BHP Billiton: A Brief Overview
Structure of BHP Billiton
Discuss about the Legitimacy Theory and Environmental Practices.
The management and operation of BHP Billiton stress upon the structure of a Dual Listed company as two entities are available that is the BHP Billiton Ltd and BHP Billiton Plc. IT is a leading global resource company and deals in extraction and processing of minerals, oil, and gas. The products of the company are sold all over the world. The presence of Board, as well as management is done in a manner that leads to a smooth flow and drives the business. The main goal of BHP Billiton is that it helps in development of long term shareholder value by the acquisition, discovery and enhancement process. It operates and own low cost assets that are diversified through commodity and market (BHP Billiton, 2017). The noticeable part of BHP Billiton is to provide safeguard to the people and enhance the safety measures to the environment and other communities. Such commitment provides a clear cut indication of the efforts of the company. However, the same cannot ascertain that the company would be free from significant issues. A significant issue happens normally in the course of business over which the business can have little control.
Some of the significant issues that have taken place recently and the significant issues that have affected the company in the recent year are as under:
The company has recently announced in December 2017 that it is proposing to leave the World Coal Association due to some disagreement relating to the climate policy. The company is one of the world leader in coal and other resources. The withdrawing from World Coal Association will be a major setback for WCA and the company as well. Although BHP has decided to remain a member of the U.S Chamber of Commerce (BHP Billiton, 2017). The company is withdrawing as it is of the opinion that due to climate change, the company would not be able to reap the profits as before (Ramdhony, 2015).
The company has declared its half year-end results which are 31st December 2017. As per the reports, there was a fall in the net profits of the company in the first half of the year. Despite the fall in profits, it has been reported that still the dividend payout has not been affected and the shareholders are enjoying higher dividends than before. The reason behind the same is that the company is expecting a high rise in commodity prices (BHP Billiton, 2017).
Commitment to Safety and Community
This is a significant issue as the company should distribute dividends on par with the profits were earned. As a matter of fact, the dividends are declared when the profit scenario of the company is strong. However, in the present scenario, the company is declaring dividend against the policies of the company that cannot be justified (Freeman & Alexander, 2013). In the times of falling profits, the company should restrict the dividend flow otherwise it will have a strong impact on the normal functioning of the company.
The company experienced a negative movement in the productivity which was seen through various points which are:
- Due to the smelter maintenance campaign, the production volumes had decreased at Olympic Dam and also resulted in an increase of non absorbance of fixed costs at an unfavourable level (Caradonna, 2014).
- The production volumes at Queensland Coal and Petroleum had also decreased.
Although the lower production in the above two segments was partially offset by two other segments/ shores, then also the negative movement in productivity amounted to approximately US$ 496 million which is a very substantial amount (Mousa & Hassan, 2015).
In December 2017, the President of US had introduced an agreement known as Tax Cuts and Jobs Act which came into effect on 01st January 2018. As per this reform, the US corporate tax rate is reduced from 35% to 21% and also brought changes in international tax provisions.
Due to change in tax rates, the company will now have to re-measure its deferred tax provisions and impairment of tax credits available to them due to reduced future tax liabilities. Moreover, due to a reduction in taxes, the accumulated earnings of non-US subsidiaries shall also be taxed which were earlier not taxed in the US (BHP Billiton, 2017).
The company along with its subsidiaries had some unrecognized deferred tax assets as at 31st December 2017 amounting to the US $ 1682 Million and also some unrecognized deferred tax liability amounting to the US $ 2318 Million due to investments made in subsidiary companies. Due to the US Tax Reforms, there was a substantial increase in deferred tax assets by US $ 834 Million and substantial decrease in deferred tax liabilities by the US $ 192 Million (BHP Billiton, 2017).
The company is expecting few more changes & judgments in the existing US Policy which may help the company and the group in maintaining appropriate provisions for deferred tax assets and liabilities. Such judgments include
Mandatory deemed repatriation of undistributed earnings and earnings from non-US subsidiaries. The company is planning to meet this out from available foreign credits.
On 5th November 2015, a significant event occurred when a dam jointly operated by BHP Billiton Brasil Limitada (BHP Billiton Brasil) and Vale S.A. (Vale) through a joint venture having 50% ownership each, collapsed. Due to his, the BHP Group had to suffer huge losses as there were both losses- of life and of property. A total of 19 people died which had to be compensated (BHP Billiton, 2017).
Recent Significant Issues
The huge amount of mine tailings was released due to the dam failure and this in form of floods affected many surrounding communities.
The group is still bearing the financial effects of the failure since 2015. The group has a loss of US $ 381 Million for the F.Y 2017.
Major rise in depreciation, amortization and impairment and finance costs
Another significant issue which arose in 2017 which had a major impact on the financials was the rise in depreciation and finance cost of the group. The major reason was –
High impairment cost of the assets and huge commissioning costs at the new water supply project launched in June 2017 due to which the depreciation costs increased two folds compared to earlier years which impacted the company’s profits (Parrino et. al,, 2012).
The company also had to bear higher interest and finance costs due to re-purchase of its bond and increase in the benchmark interest rates applicable to the company during September 2017. The company had to arrange funds for the re-purchase and the higher interest rates increased the interest costs of the company at large (BHP Billiton, 2017).
The company had to compensate the losses to the total up of US$ 181 Million for financial support of Samarco Tragedy. An amount equal to UD$ 133 Million was also decided to be used for Renova Foundation. For this, the company has entered into an agreement to undertake the losses occurred due to the Samarco Dam Failure (BHP Billiton, 2017). Various works like rebuilding, repairing and maintaining the communities are being undertaken by the company and the funds are accordingly released as per the targets achieved.
The company is also under talks to settle an agreement for negotiation of a claim of US$ 47.6 Billion and US$ 6.1 Billion relating to Dam failures (BHP Billiton, 2017). Although the Samarco Dam failure had taken place 2 years ago, its consequences are still faced by the company in the form of heavy expenditure. This is a significant issue which shall have its impact over few more years to go (Ruffing, 2017).
The high market volatility in the commodity prices had a huge impact in 2017 on the carrying value of the group assets. It impacted the future cash flows from those assets which are termed as Cash Generating Units or CGU. This phenomenon is used to assess the recoverable value of tangible and intangible assets (BHP Billiton, 2017). The high volatility also hits the companies process and its operations because there is always an uncertainty whether the assets will perform as per the expectations and there is a risk that companies assets will not fully perform and the interest costs will not be served fully or partially by the group and the subsidiaries (Peirson et. al 2015). So, the company should assume some contingent liabilities due to this uncertainty.
BHP Billiton’s Decision to Leave the World Coal Association
The company has its operation both in domestic and overseas countries. The company has installed and commissioned used projects which required huge requirements in terms of plant machinery and equipment. The projects prolong for more than 10 years and are largely dependent on manpower availability. The company operations are also affected by the country in which they operate, the legal framework, environmental requirements and the government policies. Every country has its own set of financial requirements, tax implications, and statutory regulations. There is always an uncertainty whether the subsidiaries’ assets are valued and measured correctly on the closing dates (Douma & Hein, 2013). The assets are subjected to depreciation, amortization, and impairments. It is a tedious task to correctly calculate the impairment loss and finally the carrying cost of the assets (BHP Billiton, 2017). There is a chance that carrying the cost of the assets may be overvalued in the books of accounts and the recoverable cost is incorrectly measured.
So there is a contingent liability assuming in the books of accounts related to the carrying cost of the assets and the impairment loss to be addressed in the books of accounts. As the contingent liability has a peculiar nature that is the happening cannot be guaranteed. Therefore, it is an additional burden because the company would not like it to happen (Needles & Powers, 2013). In July 2017, the overall impact of such valuation was seen in the group’s reports when a material weakness was reported relating to the impairment of some Onshore US assets in comparison to those in June 2016.
As per the half-year results declared by the company for 31st December 2017, the capital and exploration expenditure of the company has increased by 6% which was the US $ 2.9 Billion (BHP Billiton, 2017). This is a substantial rise but shall be offset by rising in commodity prices as per the estimates of the company.
Conclusion
As BHP Billiton Group is the world’s leading industry of resources, the company remains in news all over the year. Whether the issues relate to positive side or negative side of the company, these have probable effects on the company’s profitability and reputation of the company. The significant issues can have a material impact on the company if the stakeholders are of the opinion that such a happening will cause a concern (Toukabri et. al, 2014). Therefore, going by the above mentioned material facts it can be commented that BHP has many significant issues and is bound to happen for a company with such a heavy stature. When the company’s volume and operation are on a higher scale then the company is bound to have significant issues and it is upon the company to combat with the situations. The management should have adequate policies that can address and help in such environment.
References
BHP Billiton. (2017). BHP 2017 Annual report and accounts. https://www.bhp.com/media-and-insights/reports-and-presentations [Accessed 15 April 2018]
Caradonna, J. L. (2014) Sustainability: A History. Oxford University Press
Douma, S., & Hein, S. (2013) Economic Approaches to Organizations. London
Freeman, E., & Alexander, M. (2013) Stakeholder management and CSR: questions and answers. Oxford Press
Mousa, G.A., & Hassan, N.T. (2015) Legitimacy Theory and Environmental Practices: Short Notes. International Journal of Business and Statistical Analysis. [online]. 2(1), pp. 41-51. Available from https://www.researchgate.net/profile/Gehan_Mousa/publication/289045509_Legitimacy_Theory_and_Environmental_Practices_Short_Notes/links/56ade1e608aeaa696f2e85ac/Legitimacy-Theory-and-Environmental-Practices-Short-Notes.pdf
Needles, B.E. & Powers, M. (2013) Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.
Parrino, R., Kidwell, D., & Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ: Wiley
Peirson, G., Brown, R., Easton, S, Howard, P., & Pinder, S. (2015) Business Finance, 12th ed. North Ryde: McGraw-Hill Australia.
Ramdhony, D. (2015) Theoretical Perspectives on Corporate Social Responsibility Disclosure: A Critical Review. International Journal of Accounting and Financial Reporting. [online]. 5(2), pp. 22-33. Available from https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.1020.4715&rep=rep1&type=pdf
Ruffing, K. (2017) Indicators to Measure Decoupling of Environmental Pressure from Economic Growth. London: Island Press.
Toukabri, M., Ben Jemaa, O., & Jilani, F. (2014) Corporate social disclosure: Explanatory theories and conceptual framework. International Journal of Academic Research in Management. [online]. 3(2), pp. 208-225. Available from: https://pdfs.semanticscholar.org/28a2/2a9dd17de377358b5084114e0f53b6e4c9f8.pdf