BHP Group: Beats headwinds for solid quarter

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

20 January 2023, 8:00 AM

Sectors Covered:

Mining, Energy

• BHP Group’s (ASX:BHP) 2Q23 impressed despite the difficult operating conditions, with lower metal prices, tight labour markets, inflationary pressures, and significant weather.
• Tight labour markets in particular impacted WAIO, BMA, NSWEC and Nickel West.
• 1H23 unit costs for WAIO, BMA & NSWEC are expected above guidance ranges.
• Despite the labour constraints, WAIO posted record output for the half.
• Unprecedented weather triggered downgrades to BMA and NSWEC volume/costs.
• Significant working capital change (US$1.0-$1.4bn) expected in 1H23 result.
• Changes to our estimates were offset by an increase in iron ore forecasts, but this unlocked upgrades only large enough to keep BHP in fair value territory.

Performing under pressure

Iron ore. WA Iron Ore (WAIO) posted a record for the half, with 2Q23 production of 66.9mt (vs Visible Alpha consensus 64.3 vs Morgans 65mt). A result that could have been even better had BHP not be impeded by tough labour conditions in WA. BHP maintained FY23 unit cost guidance but expects 1H23 to be above the range.

Coal. A difficult half for BHP’s coal operations in QLD and NSW. Exceptional wet weather (which has continued so far this half) hampered production from both BMA and NSWEC, with labour market tightness also contributing.

This led to 2Q23 met coal production of 7.0mt (vs consensus 7.5mt vs Morgans 7.4mt) and thermal coal 2.9mt (vs consensus/Morgans 3.5mt). A reasonable relative performance, with BHP managing to offset some of the headwinds at BMA with efficiency gains.

Copper. A real mixed result. Grades increased at Escondida, but not as much as BHP had expected, leading the big miner to now expect FY23 production at the low end of unchanged guidance. Escondida produced 258kt in 2Q23 (vs consensus 269kt vs Morgans 265kt).

Olympic Dam meanwhile posted another strong quarter, with production of 54.4kt (vs consensus 51.5kt vs Morgans 50.2kt), with OD performing well but unlikely to transform its earnings quality. Pampa Norte and Antamina were broadly inline, with production and cost guidance unchanged.

Nickel West. Like WAIO, Nickel West output was hit by labour constraints with a slower-than-expected ramp up of the refinery. BHP posted nickel production of 17.7kt (vs consensus 19.4kt vs Morgans 21.0kt).

H1 adjustments. BHP flagged working capital changes of US$1.0-$1.4bn (driven primarily by metal price swings changing royalty payables and sales receivables). Derivative expense (~US$210m) related to FX supporting the previous dividend.

Analysis

A good relative performance against a number of significant industry-wide headwinds.

The second half of FY23 is expected to be better on some short-term negatives moderating or easing (such as peak labour tightness).

Forecast and valuation update

We have adjusted our FY23 estimates for the 2Q23 result and guidance changes.

The larger change has come from applying higher long-term iron ore prices (LT US$72/t real, versus previous US$65/t), which more than offset some of the FY23 changes.

Post changes our valuation-based Target Price increases to (login to view).

Investment view

BHP remains in robust shape, but compared to mid-2022 its earnings profile, operating conditions and global macro conditions have all reduced. Despite this BHP continues to push to fresh record highs in terms of share price.

As a result we are left believing BHP is trading moderately ahead of fundamentals and maintain our Hold rating with an upgraded (login to view) price target.

Risks

Cost pressures across its global business and metal demand drivers from global macro conditions.

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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.