BHP Group: Performing well against headwinds

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
22 April 2022, 9:30 AM
Sectors Covered:
Mining, Energy

  • A good underlying performance in 3Q22, with BHP Group (ASX:BHP) contending with WA’s first COVID wave at WAIO and Nickel West, and Omicron hitting Escondida.
  • We see BHP as the best placed to defend against broad inflationary and COVID pressures currently impacting the mining industry.
  • The strength of commodity prices continues to dominate short-term fundamentals, driving revenue and offsetting broad cost increases to leave EBITDA steady.
  • We maintain an Add rating on BHP with an upgraded (login to view) target price.

Solid underlying 3Q22

Iron ore steady. BHP defended against WA’s first COVID wave and a shortage of rail drivers to deliver an 3Q22 in iron ore (WAIO) production that was close to expectations at 59.7mt (vs consensus 60.7mt vs MorgE 60.1mt) -10% qoq.

BHP appeared to gain confidence in its ability to defend against broad cost pressures at WAIO, with South Flank ramping up while Yandi nears depletion.

The addition of South Flank tonnes also saw lump production boosted, which will help maximise margins at a time where BHP’s Pilbara peers are seeing sharper cost inflation and in RIO’s case reduced production of premium grade products. BHP is also benefitting from not needing to develop any new hubs within the next two decades. 

Copper down. As flagged in RIO’s quarterly, BHP underperformed on copper tonnes with throughput at Escondida down -7% from a combination of: a) intensifying COVID impact from Omicron, and b) some protest activity impeding site access.

While infection rates at Escondida peaked in February, the impact to productivity is expected to extend into FY23 at least. Olympic Dam output continues to improve post major smelter maintenance the previous quarter.

Antamina is still guided to the top end of the range, albeit BHP is monitoring the unrest in Peru closely for possible impacts. Pampa Norte was steady, while Cerro Colorado was back up and running post court process restoring its water access.

Met coal up. BHP delivered group met coal production of 10.6mt (vs consensus 10.0mt vs MorgE 10.7mt) was +6% qoq. A solid performance from BMA helped the result, rebounding from heavy wet weather the previous quarter.

Thermal coal mixed. 3Q22 production of 2.6mt trailed consensus/MorgE 3.0mt. While BHP did downgrade unit cost guidance to US$76-$81/t (from US$62-$70/t), this was the result of targeting higher quality (higher calorific value) coals which during 3Q22 were getting a price spread >$100/t vs lower quality coals.

Nickel west below. COVID had a big impact at Nickel West, impeding volumes during the quarter with 3Q22 nickel production of 58kt (vs MorgE 65kt).

Jansen on track. Shaft development is now 99% complete. After which BHP will launch into Stage 1 development underground and at the port (Stage 1 currently 5% complete). With so much potash supply in Russia and Belarus (40% of market), Jansen/potash is increasingly looking like the fifth pillar BHP has always claimed.

Analysis

Nearly two years into the pandemic, but this was undoubtedly the worst COVID quarter for BHP. WAIO and Nickel West were impacted by WA’s first COVID wave, while the already struggling Escondida workforce was hit by Omicron. 

While not immune to COVID and inflationary pressures, BHP’s position as the lowest cost iron ore miner positions its flagship WAIO business to sustain its earnings strength (also helped by the lack of development activity in the Pilbara).

Forecast and valuation update

We have updated our forecasts for guidance changes and the 3Q22 result, and rolled our model forward.

We have also lifted the lump proportion in sales and slightly trimmed inflation assumptions on WAIO unit costs to keep within guidance. Post changes our valuation increases to (login to view).

Investment view

We maintain our Add rating on BHP, with a (login to view) target price.

Risks

The largest risk to our call remains ongoing COVID-19 risks to commodity demand drivers and operations.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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