BHP Group: Chance for a special dividend

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
22 July 2019, 12:35 PM
Sectors Covered:
Mining, Energy

  • Reasonable quarter on balance. Petroleum outpaced estimates and beat FY19 guidance. Iron ore & copper met revised guidance. While coal disappointed. 
  • We see strong potential for BHP to also announce a special dividend of US$0.40ps when it reports its full year FY19 earnings next month.
  • In copper equivalent terms, production across BHP segments grew 11% in the June quarter – driven by the rebound in iron ore shipments (annualized >290mt).
  • Expects to meet full year cost guidance at WAIO, Escondida & petroleum. 
  • Both met and thermal coal missed guidance, leading to higher unit costs coming. 
  • More increases to EPS forecasts on mark-to-market of iron ore prices. 

Reasonable end to the year

Total production across BHP’s business, converted into copper equivalent terms, grew by 11% in 4Q’FY19. WA iron ore (WAIO) delivered 63mt in the quarter and met its revised FY19 guidance of 235–239mt (BHP share) coming in at 238mt, with WIAO recovering from Tropical Cyclone Veronica.

BHP is not expecting a big step up in FY20 given a major car dumper (key bottleneck) maintenance campaign in September (1Q’FY20).

Petroleum at 121 million barrels of oil equivalent (MMBOE) beat guidance of 113–118 MMBOE for the year, driven by higher gas production (in particular from Trinidad & Tobago which also saw three new discoveries).

Meanwhile copper (-4% pcp) and met/thermal coal (-1%/-18% pcp) dragged BHP’s FY19 copper equivalent production growth down to just 2% pcp.  

Potential for a special dividend 

Bumper cash flow delivered in no small part by surging iron ore prices has given BHP fresh ammo towards further capital management. We see potential for BHP to announce a cUS$0.40ps special dividend when it reports its full year result next month.

Supported by our FCF estimate of US$10bn, EBITDA margin of 53%, a capable balance sheet and minimal capex requirements

Couple of exceptional items coming

Along with the 4Q result, BHP outlined it would book two exceptional items in its full year result next month, both related to Samarco:

  1. due to legislative changes in Brazil, BHP will provision US$260m for the decommissioning of Samarco’s upstream tailings dam; and
  2. a further one-off expense adjustment for the financial impact incurred by BHP from the Samarco dam failure.

Trading near fair value

 Our valuation/PT has been lowered (Morgans clients can login to view) after:

  1. increasing Escondida/copper sustaining capex,
  2. boosting petroleum exploration capex, and
  3. lifting coal opex.

Meanwhile flushing through higher iron ore prices has seen continued upgrades delivered to our/consensus earnings estimates for FY19/FY20, but we recognise the lofty heights market optimism as risen to for our big miners ahead of these improved fundamentals.

Balancing this out with the very real prospect of continued capital management leaves us with the view that BHP is trading near fair value. 

More information

Morgans clients can login to view our detailed report and share price target for BHP (BHP). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: Analyst owns shares. 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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