6 February 2008
Number 06/08

Commentary on the Group Results

The results presented today represent an excellent operating and financial performance. These results are based on a strong production performance across the breadth of our business, outstanding cost control in the face of significant cost pressures and additional volumes from newly commissioned growth projects. Our performance has not only benefited from the unique diversification across petroleum, bulk and non ferrous commodities, but also the diversification within each of these broad categories. In particular, record half year earnings results in iron ore and manganese demonstrated that we were able to capture strong market conditions in the steel-making sector. Record half year earnings from petroleum in an environment of strong prices, were the result of excellent management of natural field decline and volume growth from new projects.

Our Underlying EBIT of US$9.6 billion is an increase of 5.4 per cent over last half-year. Underlying EBIT margin⁽⁷⁾ was 44.4 per cent. Earnings per share, excluding exceptional items, were up 2.8 per cent at 106.8 US cents reflecting the benefit of the share buy-back program. This result has been achieved in an environment in which input prices have increased significantly and currencies have appreciated strongly. The reduction in Underlying EBIT, as a result of the weaker US dollar, was US$506 million more than the corresponding period.

In pursuit of our strategy, we continue to focus on the fundamental drivers of value creation for shareholders: by operating large, long-life, low cost expandable assets while taking a disciplined and value-focused approach to pursuing additional organic and non-organic growth options.

We achieved record or equal record production⁽²⁾ for seven major commodities and significantly increased production across a further six commodities. Production records⁽²⁾ were achieved by 12 assets in six of our Customer Sector Groups. This performance reinforces our track record of consistent growth on the back of predictable project delivery coming from a deep inventory of projects that will continue to underpin our growth plans. This increased production from high returning assets has allowed us to capture the benefits of strong first half conditions in key commodity markets.

First production was successfully achieved at seven major projects: Genghis Khan, Atlantis South and Stybarrow (oil and gas), Koala Underground (diamonds), Pinto Valley (copper in concentrate), Rapid Growth Project 3 (iron ore) and Ravensthorpe (contained nickel in concentrate). We expect to deliver significant volume growth in the second half of FY 2008 with continued ramp up of these projects, and the expected commissioning of an additional four projects.

During the period we approved three new projects; the Kipper project (gas), Klipspruit (energy coal), the Gemco expansion project (manganese concentrate) and in January 2008, we approved the Newcastle Third Port Project (energy coal export capacity). All of these projects will support continued growth across a number of our businesses in future years.

In our Petroleum CSG, we are increasing our exploration budget to approximately US$600 million (up by 20 per cent) for the year ending 30 June 2008. This will enable us to further strengthen our position in the Gulf of Mexico in the United States.

Our project pipeline provides significant future value, with 26 projects in either execution or feasibility representing an expected capital investment of US$16.1 billion. We also have further medium-term options in our portfolio with expected capital expenditure requirements in excess of US$70 billion.

During this reporting period we completed seven major growth projects.

⁽ⁱ⁾ References to quarters and half-years are based on calendar years.
⁽ⁱⁱ⁾ Number subject to finalisation.
⁽ⁱⁱⁱ⁾ As per revised budget and schedule.

There are 14 major projects (defined as BHP Billiton's share of capital expenditure of greater than US$100 million) under development with a total budgeted investment of US$9,405 million. Details for these were given in the quarterly Exploration and Development Report that was released on 23 January 2008.

⁽ⁱ⁾ All references to capital expenditure and capacity are BHP Billiton's share unless noted otherwise.
⁽ⁱⁱ⁾ References to quarters and half-years are based on calendar years.

⁽ⁱ⁾ All references to capital expenditure and capacity are BHP Billiton's share unless noted otherwise.
⁽ⁱⁱ⁾ 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).

Today we announced a 45 per cent increase in our interim dividend to 29 US cents per share, the twelfth consecutive dividend increase.

During the half-year we continued to purchase shares under the previously announced US$13 billion program. Over the same period we repurchased 96,904,086 BHP Billiton Plc shares, via on-market buy-backs, at an approximate average price of US$31.57 (A$36.46 / GBP15.51). To date, we have cancelled 71,388,736 of these shares and we intend to cancel the balance. On 14 December 2007, the buy-back was suspended. To date, we have 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, 680.23 million shares have been repurchased representing approximately 11 per cent of the total shares on issue at an approximate average price of US$18.53 (A$23.25 / GBP9.57).

At completion of all announced initiatives we will have returned US$29.8 billion to shareholders through capital management initiatives and dividends since June 2001.

Higher sales volumes for copper, lead, zinc, silver, iron ore and metallurgical coal were the largest contributors to the increased volume impact on Underlying EBIT. This was partially offset by lower nickel volumes attributable to lower sales due to a 15 day shutdown of the Kalgoorlie smelter (Australia), longer lead times on sales due to the further diversification of our customer base into US and Europe and softer market conditions.

The continuing ramp up of copper production from Spence (Chile) and the recently commissioned petroleum projects contributed an additional US$254 million and US$69 million respectively to this total.

Changes in prices, including price-linked costs, increased Underlying EBIT by US$1,635 million. Higher prices for petroleum products, manganese ore and alloy, lead, copper, energy coal and iron ore were the main positive contributors. Lower metallurgical coal, zinc and nickel matte prices had a negative impact.

Price-linked costs increased Underlying EBIT by US$154 million compared with the corresponding reporting period, with decreased charges for third party nickel ore and lower treatment and refining charges for copper being the main contributing factors.

Costs (net of non-cash costs) increased by 1.9 per cent compared to the corresponding period. This is an excellent result and continues our trend of tight cost control, increased volume performance and a focus on Business Excellence improvements. This was principally due to higher raw material, fuel, energy and labour costs.

Our continued focus on Business Excellence has helped to mitigate these costs by US$84 million.

Exchange rate movements had a negative impact on Underlying EBIT of US$506 million. In particular, the weakening of the US dollar against the Australian dollar during the period, had a negative impact of US$420 million, consisting of a negative US$475 million on costs offset by a positive impact on net monetary items. Western Australia Iron Ore, Nickel West, Olympic Dam, Worsley Alumina and Queensland Coal operations (all Australia) were significantly impacted by this weakening.

The following exchange rates against the US dollar have been applied:

(a) Displayed as US$ to A$1 based on common convention.

Inflationary pressures on input costs across all our businesses had an unfavourable impact on Underlying EBIT of US$206 million. These pressures were most evident in Australia and South Africa.

The sale of assets increased Underlying EBIT by US$58 million. This was positively impacted by the sale of the Elouera mine (Illawarra Coal, Australia) and Queensland Coal (Australia) mining leases. Asset sales in the corresponding period included our interests in the Eyesizwe coal mine in South Africa and the Moranbah gas plant (Australia).

The unfavourable impact on Underlying EBIT of US$105 million was mainly due to insurance recoveries in the corresponding period.

Gross exploration expenditure was US$598 million, an increase of US$325 million on the corresponding period. Minerals exploration activity increased principally at Olympic Dam, nickel targets in Western Australia and diamond targets in Angola. The main expenditure for the Petroleum CSG was on targets in Gulf of Mexico, Colombia and Australia.

Expenditure on business development was US$54 million higher than the corresponding period mainly due to the continuing pre-feasibility study on the Olympic Dam expansion.

Other items decreased Underlying EBIT by US$366 million. These included a lower contribution from third party trading and the obligations arising from the intended sale of the Optimum (South Africa) energy coal asset. The start-up of operations at Ravensthorpe and Line 2 at Yabulu (both Australia) adversely impacted earnings by US$132 million.

Net debt increased to US$12.2 billion, an increase of US$3.7 billion from the corresponding period largely due to the share buy-back program. Consequently net finance costs increased to US$341 million, from US$301 million in the corresponding period.

The total taxation expense on profit before tax was US$2,952 million, representing an effective rate of 32.3 per cent.

Excluding the impacts of royalty-related taxation, non tax-effected foreign currency adjustments, translation of tax balances and other functional currency translation adjustments and exceptional items, the underlying effective rate was 30.1 per cent compared to the UK and Australian statutory tax rate (30 per cent). Royalty-related taxation represents an effective rate of 2.9 per cent for the current period.

The corresponding period included the recognition of US tax benefits of US$140 million.

Tax losses incurred by WMC Resources Limited (WMC), acquired by BHP Billiton in June 2005, were not recognised as a deferred tax asset at acquisition pending a ruling application to the Australian Tax Office. The ruling has now been issued confirming the availability of those losses. This has resulted in the recognition of a deferred tax asset (US$197 million) and consequential adjustment to deferred tax liabilities (US$38 million) through income tax expense at current $A/$US exchange rates. As a further consequence the Group has recognised an expense for a reduction in goodwill measured at the $A/$US exchange rate at the date of acquisition.

Net operating cash flow after interest and tax increased by 10.6 per cent to US$7.9 billion which was primarily attributable to higher profits increasing cash generated from operating activities together with a decrease in working capital, partially offset by increased taxation payments.

Capital and exploration expenditure totalled approximately US$4.4 billion for the period. Expenditure on growth projects was approximately US$3.0 billion, including US$1.2 billion on Petroleum projects and US$1.8 billion on Minerals projects. Capital expenditure on maintenance, sustaining and minor capital items was approximately US$0.7 billion. Exploration expenditure was US$598 million, including US$166 million which has been capitalised.

Financing cash flows include US$4.6 billion in relation to the capital management program and dividend payments from the increased FY2007 final dividend declared.

Net debt, comprising cash and interest-bearing liabilities, was US$12.2 billion, an increase of US$2.1 billion, or 20.1 per cent, compared to 30 June 2007. Gearing, which is the ratio of net debt to net debt plus net assets, was 28.0 per cent at 31 December 2007, compared with 25.3 per cent at 30 June 2007.

Portfolio management activities continued during the period with proceeds amounting to US$139 million being realised. The Group divested the Elouera coal mine (Illawarra Coal Operation, Australia) and mining leases at Poitrel (Queensland Coal, Australia). The sale of the Optimum energy coal mine in South Africa continues to progress.

Proceeds from the sale or distribution of our assets and interests since 2001 now surpass US$6 billion.

The following Board changes occurred during the period:

The following table provides a summary of the performance of the Customer Sector Groups for the six months ended 31 December 2007 and the corresponding period.

⁽¹⁾ Underlying EBIT includes trading activities comprising the sale of third party product. Underlying EBIT is defined on page 15.

⁽²⁾ Includes consolidation adjustments, unallocated items and external sales from the Group's freight, transport and logistics operations.

Underlying EBIT was US$1,972 million, an increase of US$360 million, or 22.3 per cent, over the comparative period. Total production for the half year of 60.54 million barrels of oil equivalent was 5 per cent higher than both the corresponding and the prior periods reflecting the contribution of newly commissioned projects, strong gas demand in Australia, strong operating uptime, and infill and development drilling.

The increase in Underlying EBIT was mainly due to higher average realised oil prices per barrel of US$81.20 (compared with US$63.77), higher average realised gas prices of US$3.42 per thousand standard cubic feet (compared with US$3.27), higher average realised prices for liquefied natural gas of US$7.79 per thousand standard cubic feet (compared to US$7.44) and higher average realised prices for natural gas liquids of US$51.89 per barrel (compared to US$40.04).

Petroleum successfully commenced oil production at Genghis Khan and Atlantis South in the Gulf of Mexico, and at Stybarrow in Western Australia. Stybarrow was brought on two months ahead of schedule and is exceeding early production forecasts.

Gross exploration expenditure was US$295 million of which US$196 million was expensed. We successfully captured acreage in the October 2007 Gulf of Mexico lease sale process, made the Thebe gas discovery (offshore Australia) and continued to build a diverse portfolio of opportunities with seismic data acquired in Colombia, Brazil, Namibia, Australia and the Gulf of Mexico during the half-year.

Underlying EBIT was US$680 million, a decrease of US$160 million or 19.0 per cent over the corresponding period. Lower LME prices for aluminium, partially offset by higher premiums, had an unfavourable impact. The average LME aluminium price decreased to US$2,494 per tonne (compared with US$2,602 per tonne). Realised alumina prices were in line with the corresponding period.

Half-year production records were achieved at the Worsley (Australia), Paranam (Suriname), Alumar (Brazil) and Hillside (South Africa) operations. In particular, production from the Worsley DCP expansion has exceeded nameplate capacity. Mozal (Mozambique) equalled its previous record production.

Unfavourable exchange rate movements as a result of a weaker US dollar had an unfavourable impact of US$49 million on Underlying EBIT.

Underlying EBIT also reduced due to higher charges for energy, depreciation, maintenance, raw materials and labour. However, an intensive focus on cost containment through various Business Excellence initiatives resulted in Underlying EBIT benefits being added, dampening the full impact of cost increases. Earnings from third party trading were lower than the corresponding period.

Underlying EBIT was US$3,367 million, an increase of US$478 million, or 16.5 per cent, over the corresponding period. This increase is predominantly attributable to higher production of copper, zinc, silver and lead. Higher copper production was largely due to the continued ramp-up of Spence and the Escondida Sulphide Leach Project (both Chile). This was partially reduced by lower volumes at Olympic Dam and Cerro Colorado (Chile). Cannington (Australia) also produced higher volumes. Copper concentrate production for the half-year was a record, despite two earthquakes in Chile and unplanned SAG mill outages at Antamina (Peru).

Underlying EBIT was US$72 million, a decrease of US$6 million, or 7.7 per cent compared with the corresponding period. This was mainly due to increased exploration activity on diamond targets in Angola, lower value per carat diamonds and unfavourable exchange rate movements for Canadian Dollar and Rand against the US$. This was partly offset by higher diamond sales volumes and lower unit costs at Ekati (Canada) due to the processing of higher grade material, moving to underground mining areas and increased cost efficiencies.

Underlying EBIT was US$1,673 million up US$269 million, or 19.2 per cent higher. This was driven by increased prices, higher sales volumes and higher priced spot sales.

Record production was achieved at our Western Australia Iron Ore operation with additional capacity implemented as a result of RGP2 and the early realisation of efficiencies resulting from the commissioning of the RGP3 assets. Samarco (Brazil) also achieved record production as a result of production efficiencies. Record sales volumes reflected business improvement initiatives undertaken to promote increased shipping efficiency.

Higher operating costs were largely attributable to the weaker US$ against the A$, price linked costs, freight and the impact of tie-in activity associated with RGP3. A number of cost saving initiatives that commenced in the year ended June 2007, including the negotiation of contract mining rates, the extension of selected contract terms, and strategic sourcing of input materials and services have alleviated to some extent the full impact of external cost pressures on the business.

Underlying EBIT was US$431 million, an increase of US$326 million or 310.5 per cent. This increase was mainly due to higher sales prices achieved for alloy and ore as well as record manganese ore sales volumes.

Underlying EBIT was US$523 million, a decrease of US$134 million, or 20.4 per cent. This decrease was mainly attributable to lower prices (a negative US$217 million) however this was partially offset by higher sales volumes at both Queensland and Illawarra Coal. The increase in sales volume reflects strong demand and was supported by the expanded capacity at the Hay Point terminal.

Operating costs were higher due to increased demurrage and labour costs which was offset by improved mining conditions at Illawarra Coal. A weaker US$ against the A$ had an unfavourable impact as did Australian inflationary pressures.

Profits on the sale of the Elouera mine and the sale of mining leases to Millennium was realised in the current period.

Underlying EBIT was US$277 million, an increase of US$35 million, or 14.5 per cent, compared with the corresponding period. Higher export prices resulting from continued strong demand in the Atlantic and Pacific markets and higher production volumes at Hunter Valley Coal (Australia) and Cerréjon Coal (Colombia) had a favourable impact on results. This was offset by recognition of obligations associated with the intended sale of the Optimum asset, the weakening of the US$ against the Rand, the Australian dollar and the Colombian Peso, the cessation of Underlying EBIT from the Koornfontein mine (South Africa) following its divestment during last year and the profit on the divestment of Eyesizwe included in the corresponding period. Lower earnings from the trading of third party product and increased freight cost also negatively impacted Underlying EBIT.

Corporate Costs were US$171 million compared to US$120 million in the corresponding period, an increase of US$51 million, mainly due to negative impacts of the stronger Australian dollar.

(1) Net operating cash flows are after net interest and taxation.

(2) Unless otherwise stated production volumes exclude suspended and sold operations. Includes one equal record production for aluminium.

(3) Based on share price of US$22.92.

(4) Underlying EBIT is earnings before net finance costs and taxation and any exceptional items. Underlying EBITDA is Underlying EBIT before depreciation, impairments, and amortisation of US$1,544 million for the half-year ended 31 December 2007 and US$1,360 million for the half-year ended 31 December 2006. From 1 July 2007, the Group adopted the accounting policy of recognising its proportionate interests in the assets, liabilities, revenues and expenses of jointly controlled entities rather than equity accounting its interest. Jointly controlled entities' net finance costs and taxation are therefore included in their respective line items and are no longer reconciling items between profit from operations and Underlying EBIT or Underlying EBITDA. Comparative information has been restated on this basis, however the change did not result in a change to comparative Underlying EBIT and Underlying EBITDA information contained within this profit release.

We believe that Underlying EBIT and Underlying EBITDA provide useful information, but should not be considered as an indication of, or alternative to, attributable profit as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity.

(5) Underlying EBIT is used to reflect the underlying performance of BHP Billiton's operations. Underlying EBIT is reconciled to Profit from operations on page 5.

(6) For this purpose, net interest includes capitalised interest and excludes the effect of discounting on provisions and other liabilities, fair value change on hedged loans, net of hedging derivatives, exchange differences arising from net debt and return on pension plan assets.

(7) Underlying EBIT margin is calculated net of third party product activities.

For the half-year ended
31 December 2007

Consolidated Income Statement - Page 18

Consolidated Statement of Recognised Income and Expense - Page 19

Consolidated Balance Sheet - Page 20

Consolidated Cash Flow Statement - Page 21

Notes to the Half-Year Financial Statements - Page 22

1 Accounting policies - Page 22

2 Business segments - Page 23

3 Exceptional items - Page 27

4 Interests in jointly controlled entities - Page 27

5 Net finance costs - Page 28

6 Taxation - Page 28

7 Earnings per share - Page 28

8 Dividends - Page 29

9 Assets classified as held for sale - Page 29

10 Total equity - Page 30

11 Contingent liabilities - Page 30

12 Subsequent events - Page 30

(a) Comparative periods have been restated as described in Note 1.

The accompanying notes form part of these half-year financial statements.

The accompanying notes form part of these half-year financial statements.

(a) Comparative periods have been restated as described in Note 1.

The accompanying notes form part of these half-year financial statements.

(a) Comparative periods have been restated as described in Note 1.

Notes to the Half-Year Financial Statements
 

This general purpose financial report for the half-year ended 31 December 2007 is unaudited and has been prepared in accordance with IAS 34 'Interim Financial Reporting' as issued by the IASB, IAS 34 'Interim Financial Reporting' as adopted by the EU, AASB 134 'Interim Financial Reporting' and the requirements of the Disclosure and Transparency Rules of the Financial Services Authority in the United Kingdom and the Australian Corporations Act 2001 as applicable to interim financial reporting.

The half-year financial statements represent a 'condensed set of financial statements' as referred to in the UK Disclosure and Transparency Rules issued by the Financial Services Authority. Accordingly, they do not include all of the information required for a full annual financial report and are to be read in conjunction with the most recent annual financial report. The comparative figures for the financial year ended 30 June 2007 are not the statutory accounts of BHP Billiton for that financial year. Those accounts, which were prepared under IFRS, have been reported on by the Company's auditors and delivered to the registrar of companies. The report of the auditors was unqualified and did not contain statements under Section 237(2) or (3) of the UK Companies Act 1985.

The half-year financial statements have been prepared on the basis of accounting policies consistent with those applied in the 30 June 2007 annual financial statements contained within the Annual Report of the BHP Billiton Group, except for the impact of adopting AASB 2007-4 'Amendments to Australian Accounting Standards Arising from ED 151 and Other Amendments'. AASB 2007-4 reinstates optional accounting treatments permitted by IFRS that were not initially available under Australian Accounting Standards. AASB 2007-4 will be applied in the Group's annual financial statements for the year ending 30 June 2008 and has therefore been applied in these half-year financial statements. The principal impacts of AASB 2007-4 are described below.

The Group has also elected to adopt the indirect method of cash flow presentation as permitted by AASB 2007-4 and IAS 7 'Cash Flows Statements'. The Group believes this change in presentation more effectively conveys the relationship between its financial performance and operating cash flows.

Amounts in this financial report have, unless otherwise indicated, been rounded to the nearest million dollars.

The BHP Billiton Group has grouped its major operating assets into the following reporting segments: