BHP Group: Defends on volumes and costs
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 21 July 2021, 8:00 AM
- Sectors Covered:
- Mining, Energy
- A good end to FY21 for BHP, with solid performances from iron ore, petroleum and metallurgical coal.
- Shaking off a difficult operating environment in WA, BHP posted a record performance from its iron ore business.
- BHP achieved FY21 guidance across its business, while petroleum volumes were slightly ahead and unit costs below guidance.
- The strength of BHP’s fundamentals support its current share price, although the limited upside potential has impacted our conviction beyond its attractive yield. We maintain our HOLD rating.
BHP Group (ASX:BHP) posted a strong 4Q21 operational result, ahead in most segments.
In stark contrast to RIO, BHP reported a strong June quarter performance from its West Australian Iron Ore (WAIO) operations, with WAIO iron ore production (100% basis) of 72.8mt (vs MorgE 71mt) +9% qoq. BHP also maintained unit cost guidance for WAIO. This confirmed our belief that BHP was likely better navigating through tight labour market conditions in WA and also more effectively managing cost pressures.
Group copper production of 403kt was +3% qoq and +6% vs MorgE (379kt). With Escondida, Olympic Dam and Antamina coming in ahead of our estimates. Although Escondida (which represents ~62% of BHP’s copper business), continues to be heavily impacted by COVID. BHP maintained FY21 guidance.
Petroleum was another bright spot in 4Q21, posting surprising growth in volumes at 27mmboe (vs MorgE 24mmboe) +6% qoq. Impressive uptime at Atlantis (GoM) and better-than-expected seasonal demand in the Bass Strait, combined with the startup of the Ruby field in Trinidad & Tobago to carry the result ahead of estimates and just above FY21 guidance. As a result, BHP also commented that petroleum unit costs are likely to be below FY21 guidance.
Coal volumes were mixed, with met coal ahead of our estimates (+23% qoq) while thermal coal volumes fell short (but still +31% qoq).
BHP flagged a minor US$85m impairment for the August result (writing down residual value of Cerrejon post its US$580m sale to Glencore), as well as US$150- $200m of direct COVID-19 related expenses.
The impressive iron ore performance is indicative of BHP’s larger and more sophisticated capital and labour resources vs close peers. We expect it to remain in a position to defend against cost pressures.
Bumper FCF generation and coal sale proceeds capable of funding a healthy ordinary dividend and leaving potential for a special dividend and/or buyback.
Forecast and valuation update
We have made a number of minor changes to our forecasts post 4Q21.
The majority of changes have been made to copper and petroleum segments, in line with FY22 guidance, summarised further in report.
We maintain our HOLD recommendation on BHP, with a revised (login to view) target price, after making minor adjustments post 4Q21.
BHP’s elevated share price appears justified given the strength of its high quality earnings. But its return profile does appear limited to its attractive dividend profile.
Iron ore’s dominant share of earnings, delivered by record prices, has made spot iron ore prices a primary catalyst for BHP despite its diversified business.
BHP’s earnings result presents as a catalyst, along with capital management.
Iron ore price has become a primary risk given its record levels, which has concentrated BHP’s earnings.
Broader COVID-19 related demand risk for commodities.
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