BHP Group: Further upside potential

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
20 January 2021, 8:00 AM
Sectors Covered:
Mining, Energy

  • A good 2Q21 operational result from BHP Group (ASX:BHP), with iron ore and copper production both <1% of our estimates, and on track for 2021 guidance.
  • Nickel West came in 10% ahead of our estimate, while met and thermal coal were down but close to our estimates. Petroleum missed on hurricane impact.
  • Impairment of US$1.15-1.25bn against NSWEC flagged for the upcoming 1H21 earnings result.
  • Realised 1H prices for copper (+39%), iron ore (+35%) and nickel (+22%) will drive strong first half earnings when BHP reports on 16 February.
  • Net debt remains at the low end of BHP’s US$12-17bn target range.
  • BHP share price has performed well on recent commodity strength, but we see further legs to the cycle and maintain a Hold recommendation.

Good quarter overall

Overall a consistent 2Q21 operational result from BHP, with production from key West Australian Iron Ore (WAIO) (actual 62.4mt vs MorgE 63mt) and copper (actual 428kt vs MorgE 425kt) businesses landing within <1% of our estimates and on track for 2021 guidance.

2Q21 petroleum production (actual 23.8mmboe vs MorgE 25.7mmboe) was 7% below our estimates on a larger-than-expected impact from hurricane activity.

Metallurgical and thermal coal output was close to our estimates (met actual 9.5mt vs MorgE 9.7mt and thermal 3.6mt vs MorgE 3.8mt), with weather impacting both during 2Q21 in addition to a damaged ship loader at Newcastle further hampering NSWEC volumes.

Nickel West posted a solid quarter, with production (actual 24kt vs MorgE 22kt) 10% ahead of our estimate.

US$1.15-1.25bn impairment

BHP flagged it would write down the value of its NSWEC (thermal coal) assets by US$1.15-1.25bn, leaving a remaining carrying value on the books of just US$250-350m.

BHP attributed the impairment to the deterioration in Australian thermal coal market conditions, the higher AUD, and lower likelihood it will be able to recover accumulated tax losses given announced plans to divest. At present BHP is not selling any coal into China, but has been able to place these tonnes into other markets.

Iron ore market sensitive to any further losses

So far this calendar year iron ore has averaged ~US$170/t. While already strong, we see further upside over the next two months with WA in its wet season. Any unexpected supply losses would contribute to tight supply conditions and could see further price strength.

At any rate, the strength of spot prices is supplying a substantial earnings tailwind for BHP and impressive dividend profile.

Maintain Hold rating

We recently lowered our rating on BHP to Hold (from Add) on its share price strength.

While trading modestly above our expected TSR, we see plenty of reasons to maintain positions in the big miner, with upside risk to earnings, an impressive dividend profile, comparative sector fundamentals strength and BHP’s attractive mix of commodity exposures. The key risk to our call is global macro (commodity demand driven).

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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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