Capital discipline driving cycle
Our heavy preference for BHP Billiton (BHP) amongst our large-cap resources coverage is closing in on its third year, with the recovery phase of the commodity price cycle having broadened and progressed. Despite the recovery maturing we have seen continued supply discipline across bulks (iron ore and coal), which dominate the earnings mix of the major diversified miners. Adding to that has been the lack of capex globally invested by the oil and gas industry (more oil than gas) and base metals (more a case of lacking new discoveries).
For BHP, which has a mix of exposures across these markets, we see a potentially significant period of exceptional cash flow generation (save for any global financial crisis).
Slightly softer 1Q19
BHP maintained all production and unit cost guidance, outside of copper production guidance which it trimmed 3% to 1,620-1,750kt following unexpected outages at Olympic Dam and Spence. Escondida meanwhile produced broadly as expected, with the three concentrators helping to offset grade decline.
Petroleum production meanwhile was as expected, outside of Trinidad and Tobago which saw an increase in tax barrels (government production share). Along with the 1Q19 result BHP also reported further exploration success in the Gulf of Mexico and Trinidad and Tobago.
Iron ore volumes drifted 3% lower in 1Q19, impacted by BHP's maintenance optimisation and port reliability projects. Coal volumes were weaker than expected in 1Q19 with BHP highlighting unchanged guidance with output heavily weighted to 2H19.
Nickel West also saw a small interruption with a fire at its Kalgoorlie smelter.
Shareholder return decision imminent
How and when BHP will distribute its near-US$11bn of net proceeds from the divestment of its US onshore oil and gas assets will be decided at a board meeting scheduled for late October. It remains our view (our hope) that the proceeds will be split between a special dividend (to reward income-focused retail investors) and a buyback.
In addition to the asset sale proceeds, we expect capital management will remain a focus for BHP in future results given its Free Cash Flow outlook.
After updating and rolling forward our model, our valuation-derived price target has been increased (Morgans clients can login to view our share price target). As a result, and combined with our positive view on the continuing cycle, we maintain our Add recommendation.
The key risk to our call remains commodity price risk.
Morgans clients can login to view our detailed report and increased share price target for BHP Billiton (BHP). Alternatively, please contact your nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
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