BHP Group: May need to make up ground

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
23 January 2020, 1:20 PM
Sectors Covered:
Mining, Energy

  • Overall a positive second quarter operational result from BHP.
  • Iron ore shipments were slightly behind our estimate, leaving BHP’s FY20 guidance exposed to lost tonnes in the wet season (Q3).
  • Copper was the standout, led by a solid performance from Escondida.
  • We expect shareholder distributions to be a key focus again in BHP’s upcoming February earnings result.
  • Justifying its share price on a TSR basis, we maintain our Hold recommendation (login to view detailed reports and target prices).

Iron ore could fall off the pace 

A relatively steady performance from BHP’s West Australian Iron Ore (WAIO) operations, with Q2 production of 60mt (BHP share) vs Morgans 61.7mt.

Q2 volumes were impeded by the car dumper maintenance program that was concluded in October.

While on track for its FY20 production guidance of 242-253mt after the first half, BHP could end up relying on a strong Q4 to make up any tonnes lost in the current wet season.

More than offsetting the slightly lower volumes has been the strength of spot iron ore prices during the first half, which we expect to provide heavy support to the big miner’s interim earnings result due on 18 February.

Copper / coal surprise at either ends 

An impressive Q2 from Escondida, with the aging copper operation continuing to offset declining grades with increased throughput. This saw Escondida produce 309kt of copper in Q2 +9% pcp. This helped Q2 group copper production to 455kt, also up 9% pcp.

Olympic Dam was also ahead in terms of volumes, with operations rebounding from the previous quarter.

Meanwhile BHP reported disappointing coal volumes, with NSW Energy Coal (-11% pcp) hampered by smoke/dust caused by regional bushfires while Queensland Coal (+9% pcp) was dragged on by wash plant maintenance, while petroleum was in line at 28mmboe (vs Morgans 27.7mmboe) with Gulf of Mexico carrying the performance. 

Continuing bumper dividends

Elevated earnings, a lack of capex commitments and a healthy balance sheet have combined to see BHP once again left with sizable ammunition it can use to lift its dividend payout ratio and/or pursue a new share buyback (making use of its large franking credit balance).

This strong return profile remains a key support for our Hold recommendation despite BHP trading ahead of our target price.

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Worth holding onto 

BHP holds a better diversified earnings mix than close peer Rio Tinto, reducing BHP’s downside risk exposure to buoyant spot iron ore prices.

While iron ore was a standout performer in 2019, we see potential for a moderate recovery in coal and energy resources that could see BHP better positioned in 2020.

In either case, we expect BHP to preserve its balance sheet strength while maintaining healthy dividends to shareholders.

We are less confident in our ability to predict what BHP will do with those assets approaching crossroads:

  1. Olympic Dam (BHP appears wedded to?)
  2. 2) Jansen (can BHP mine/sell for value?)
  3. 3) Scarborough (does it progress into binding agreement?)
  4. hermal coal operations (how quickly does BHP cut/commit to thermal coal?).

The key risks to our Hold call are global macro drivers (i.e. commodity demand).

More information

Morgans clients can login to view our detailed report on BHP Group. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: 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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