BHP Group: Iron ore could give better opportunity
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 22 October 2019, 1:06 PM
- Sectors Covered:
- Mining, Energy
- A slow start to FY20 for BHP with production across the group lower in 1Q, although this was largely flagged in previous market updates.
- Iron ore and coal saw lower volumes from planned maintenance outages.
- BHP has announced it will spend US$345m on Jansen, ahead of a decision on the project going to the board in February 2021.
- Weakening demand could see short-term iron ore price volatility.
- Trading near fair value, we recommend holding fire to see if iron ore price volatility unfolds and provides a better entry point into BHP.
Slow start – although well flagged
BHP kicked off FY20 with lower overall production, although this was already well flagged to the market in the previous June quarter, particularly in iron ore (mega shutdown on replacement of old car dumpers at Port Hedland) and coal (maintenance of washplants at QLD coal).
Quarter-on-quarter, iron ore (down 3% on the previous quarter to 61mt), thermal coal (down 24% to 6mt), metallurgical coal (down ~21% to 9mt) and copper (down 3% to 430kt) all tracked lower.
Petroleum declined -1% on the previous quarter to 29mmboe, with an impact from planned maintenance at NWS, Tropical Storm Barry and continuing natural field decline.
A more detailed recap can be found further in the report.
Starting to show something on exploration
We look forward to BHP's upcoming investor day, to gain more information on its exploration successes.
In petroleum, with exploration continuing to generate further good results, Trion's 3DEL well in Gulf of Mexico encountered oil above the level of previous intersections, while 1 of 2 exploration wells in Trinidad encountered hydrocarbons.
While in copper we (and the rest of the market) are watching Oak Dam with interest (the discovery made to the south of Olympic Dam), only 14 holes so far but some good intersections.
Changes to estimates
We have made some changes to our assumptions post the 1Q result. In addition to making some minor adjustments to production consistent with the 1Q result, we have also:
a) Lowered our long-term Australian dollar to A$0.72 (from A$0.76)
b) Included a risk-adjusted DCF for Trion (GoM) rather than in situ multiple
c) Trimmed WA iron ore sustaining capex to A$7.0/t (was A$7.5/t)
d) Reduced Nickel West opex to US$5.30/lb (was A$6.20/lb)
Iron ore could give better opportunity
We view falling Chinese steel prices as indicative of weak demand conditions for this seasonally slower time of year, made worse by deteriorating economic conditions in China (where stimulus spending looks inadequate to offset).
With the spot iron ore price already trading ~40% above the marginal cost of production, and the ongoing recovery in seaborne supply, we view now as a good time to 'hold fire' on our big iron ore miners and wait for a better entry point.
We maintain a Hold rating on BHP (Morgans clients can login to view detailed reports and price targets here); see valuation breakdown on page 4.
The key risk to our call is commodity / macro risk.
Morgans clients can login to view our detailed report and updated share price target for BHP. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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