BHP: Solid Q1 result

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

22 October 2015, 8:07 AM

Sectors Covered:

Mining, Energy

Key points

• Q1 saw BHP post a solid start to what should be a difficult year in terms of lower output and commodity price volatility.
• Production from BHP's four pillars (petroleum, iron ore, copper and coal) came in either ahead or in-line with our estimates for the quarter.
• BHP trimmed a further US$200m from FY16 petroleum capex guidance to US$2.9bn, with savings across the segment including US onshore where BHP has reduced down to seven rigs (from nine).
• Despite reduced expenditure, BHP made no change to full year production guidance across the business.
• We continue to expect BHP's FY16 operational cash flow will be ~US$1bn above the amount needed to service its sustaining capex and progressive dividend.

Iron ore heading to 290mpta

Total iron ore production for the September quarter came in ahead of our estimates at 61mt (vs Morgans 59mt), up 2% Q-o-Q, as Jimblebar ramps up in the Pilbara. BHP is installing a new primary crusher and additional conveyor at Jimblebar to underpin its 290mt pa target. The cost of the expansion remains within BHP's guided US$ 5/t capex for iron ore (that includes sustaining capex).

Petroleum starts off strong

Guidance still points to a year on year decline for BHP's petroleum production in FY16, but the miner started off the year strongly with total petroleum production up 3% Q-o-Q at 65mmboe (vs Morgans 61mmboe). Despite keeping production guidance unchanged, BHP trimmed US$200m off its petroleum capex to US$2.9bn. BHP's oil sensitivity has increased as margins have declined on falling oil prices; this also presents potential for a positive re-rating should the oil price find some near-term support.

Copper declines less than expected

As was the case with peer Rio Tinto, BHP managed to offset the well flagged decline in production from Escondida (on lower grades) with increased output from elsewhere. Olympic Dam in particular was impressive with production up to 55kt after recovering from a mill outage in FY15. Antamina also impressed with higher grades and recoveries supporting copper production of 35kt.

Coal roughly in-line

September was a weaker quarter for BHP's coal operations in terms of production, with a number interruptions from longwall movements and wash-plant shutdowns. Still, Q3 production of 20mt (10mt thermal / 10mt coking) fell in-line with our estimates. We have been impressed with BHP’s ability to defend limited profitability in coal under difficult market conditions.

Maintain our Add recommendation

We maintain our Add recommendation. Morgans clients should login to view our price target for BHP. The key risk for BHP in the short-term remains commodity price risk.

More information

Morgans clients can login to view further detailed analysis on BHP Billiton (BHP). Alternatively, contact your nearest Morgans office for more information.

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