Case study: Big Australian's $8.5bn bonanza

BHP Billiton yesterday delivered the biggest profit in Australian corporate history, a $US6.4 billion ($8.5 billion) bonanza driven by rampant Chinese demand for iron ore, coal and oil.

Chief executive Chip Goodyear said the world's biggest miner was ideally placed to respond to a predicted super cycle in commodity prices if countries such as India and Brazil emulate China's lift-off.

The result easily eclipsed the previous record profit of $US3.4 billion, reported by BHP itself this time last year.

Combined with the earnings this year from former BHP units BlueScope Steel and Onesteel, the Big Australian has effectively delivered profits of more than $9.6 billion.

‘We are seeing buoyant conditions in the emerging and developing economies around the world and that is, offsetting a slight slowing in industrial production growth in the (developed) nations,' Mr Goodyear told reporters.

‘We have a full range of ... expansion options which will enable us to continue to catch our share of demand, if we, in fact, are in a period of demand growth brought about by the demands of several billion people across the world to participate in the benefits of modern society'.

The result underscores a record-breaking profit reporting season in Australia, with 75 per cent of companies so far exceeding or meeting stock market expectations.

The result from BHP is a new high point in the stark turnaround of the company, which at the end of the 1990s slipped into the red after massive write-downs of bungled projects and failed acquisitions.

BHP has since been transformed into the world's biggest miner through its merger in 2001 with British-based Billiton.

Requirements:

(a) BHP Billiton's announcement of its biggest profit in Australian corporate history is a strong signal of the firm's earnings prospects. Explain the contents of this announcement in relation to the information perspective and Signalling theory. What could BHP Billiton do in relation to its profits to strengthen the signal even further?

(b) What factors might increase the credibility of the signal provided by BHP Billiton's announcement and media attention? What factors might decrease the credibility of this signal?

(c) What do you expect will be the impact of the record earnings on management compensation contracts of BHP Billiton? Explain.