BHP slows iron ore growth

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

22 April 2015, 10:54 AM

Sectors Covered:

Mining, Energy

BHP Billiton (BHP) released its Q3 FY15 result this morning.

First impression

• A quarter driven by strength in iron ore output, with declines across most other segments (almost the opposite to Rio's weather-impacted quarter).
• Slows iron ore growth: A key highlight in the result, BHP has flagged it will take a "slower path to system capacity of 290mtpa" in iron ore. 
• BHP maintains a long-term view on the iron ore market: Although opting for a slower path to 290mtpa, BHP has shown it sees low-cost production gains as being still appealing despite exceptional iron ore price weakness.
• FY15 guidance lifted: BHP has lifted iron ore output guidance for FY15 by +13% to 230mt. For the March quarter iron ore output increased +5% Q-o-Q. Showing little concern for weaker iron ore prices.
• Lower across most segments: Softer quarterly production out of met coal (11.5mt, -15% Q-o-Q), alumina (1.2mt, -11% Q-o-Q), aluminium (245kt, -4% Q-o-Q), manganese ore/alloys (-11%/-10% Q-o-Q), and nickel (32.5kt, -5% Q-o-Q). While higher output was posted from copper (460kt, +5% Q-o-Q) and thermal coal (19.7mt, +6% Q-o-Q).
• Capex trim in petroleum: BHP continues to trim capex across petroleum (which was previously immune to its capital austerity drive). BHP has spent US$2.275bn in the first 9 months of FY15 (down -10% Y-o-Y). We expect BHP to make deeper cuts to expenditure heading into FY16.
• Post the South32 demerger: BHP is targeting substantial additional cost savings above and beyond the $4bn in savings targeted by the end of FY17.

Our view

The higher iron ore output (& lift in guidance) is unlikely to be well received by the market, given BHP is selling more tonnes into an already saturated iron ore market.

However, we hold a positive view on BHP ahead of the planned South32 demerger and view short-term share price volatility as an opportunity.

More information

Further analysis on BHP will be published later today for Morgans clients, which can be accessed once you login. Alternatively, if you are interested in finding out more, please contact your nearest Morgans office. 

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