BHP Group: Solid underlying despite rain and COVID-19
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 21 April 2021, 3:30 PM
- Sectors Covered:
- Mining, Energy
- Despite heavy weather and COVID-19 impacts, BHP Group (ASX:BHP) posted a solid underlying operational performance across iron ore, copper, petroleum and nickel. While both metallurgical and thermal coal disappointed.
- Iron ore shipments were strong, with BHP expecting upper half of FY21 guidance.
- Copper was good overall, with Olympic Dam and Antamina both strong in 3Q21.
- Post the quarter result BHP has made a number of adjustments to its FY21 guidance. While FY22 guidance for Escondida looks like another tough year.
- We have applied upgraded iron ore and copper prices to our estimates.
- Adjusting our model for 3Q21 we maintain our Hold rating with new TP (login to view target price).
Iron ore on track for upper half
BHP posted 3Q21 iron ore production of 67mt (-2% vs MorgE), down -6% QoQ, on a heavy wet season. This is still enough to see BHP on track for the upper half of FY21 guidance.
BHP did not report the same labour shortages reported by close peer RIO, only experiencing limited cost changes and maintaining unit cost guidance.
While the first half still looks like the peak period for iron ore prices, the strength of spot prices (+US$170/t) is still supporting a material upgrade cycle.
Copper positive overall…
Group copper production was 2% ahead of our estimate at 391kt, but down -9% QoQ due mostly to COVID-19 impacts.
Escondida trailed our estimate by -2%, although this was more than offset by a strong performance from Olympic Dam (+13% vs MorgE) and Antamina (+21% vs MorgE).
While trailing our estimate in 3Q21, BHP did upgrade FY21 guidance for Escondida by c3% and as a result cut unit cost guidance.
Also setting FY22 guidance for Escondida, BHP outlined depressed volumes are likely to continue with Escondida’s workforce heavily impacted by COVID-19.
…while petroleum, nickel and coal were more mixed
Good performances from both petroleum (+9% vs MorgE) and nickel (+5% vs MorgE), while both metallurgical coal (-4% vs MorgE) and thermal coal (-14% vs MorgE).
Petroleum impressed with a 9% increase in production despite an active hurricane season and Atlantis downtime during 3Q21. Nickel production was marginally above our estimate on less of an impact from maintenance at Kwinana during the quarter.
Thermal coal was the weak point in the 3Q21 result, with BHP reporting double the average amount of rain. Heavy rain has continued into April, leading BHP to cut its thermal coal guidance.
Waiting for a better entry point
In absolute terms a lower quarter, due to weather and COVID-19, but a good result relative to our estimates (ex-coal). A case of iron ore and copper price strength easily trumping volatile production volumes.
While we see earnings in a peak phase for BHP, there is significant opportunity for moderating iron ore prices (if they eventuate) to be offset by a continued recovery in coal and energy prices and ongoing strength in copper.
We have updated our model for the 3Q21 result, reflecting guidance changes, and upgraded iron ore/copper/thermal coal forecasts and lower met coal.
Net of these changes we have increased our target price (login to view). As a result we maintain our Hold rating. The key risk to our call is demand drivers for key commodities.
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