BHP Group: Positioned to chase new growth
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 20 January 2022, 9:00 AM
- Sectors Covered:
- Mining, Energy
- Over the next 12 months we are on the lookout for BHP Group’s (ASX:BHP) ‘next step’ after watching the big miner simplify its business through the divestment of petroleum and coal assets. Leaving a gap that we expect more meaningful acquisitions will fill.
- A mixed 2Q22 operational result although with a strong performance from WAIO (iron ore), vs softer group copper production which was the key negative surprise.
- We estimate an interim ordinary dividend for BHP of US$1.26ps, equivalent to an annualised ~7.5% dividend yield.
- No change to our view post the 2Q22 result. BHP remains one of our key sector preferences given its robust FCF generation and yield profile.
Mixed 2Q22 operational result
Iron ore well ahead. Strong output from WAIO with 2Q22 iron ore production of 66.1mt, vs MorgE 63.1mt. This also outpaced consensus expectations of 63.8mt according to Visible Alpha. 2Q22 was impressive given the maintenance during the quarter, with BHP now expecting unit costs at the lower end of FY22 guidance.
Copper disappoints. 2Q22 group copper production disappointed (-10% vs MorgE), with: a) Escondida still impacted by COVID hurting throughput and recoveries (-5% vs consensus), b) Pampa Norte impeded by a fatality and grade drop (-26% vs consensus), and c) the major maintenance program at Olympic Dam biting harder than expected (-51% vs consensus). Antamina was a lone positive although a small contributor relative to group numbers.
Coal again soggy. Wet weather hurt coal output across both QLD Coal and NSW Energy Coal (NSWEC). This saw 2Q22 metallurgical coal volumes of 8.8mt (-15% vs consensus) and thermal coal (ex-Cerrejon) of 3.0mt (-12% vs consensus).
Guidance changes. BHP now expects FY22 copper at the low end after downgrading guidance for Pampa Norte. While BHP cut NSWEC production guidance and increased QLD Coal cost guidance. Iron ore guidance for FY22 remained unchanged, although BHP expects unit costs to be at the lower end.
Other news. Nickel West produced a reasonable 21.5kt (-2% vs consensus), while Jansen (potash) remains on schedule with development of the shaft 98% complete and BHP now tendering for Stage 1 contracts.
Copper drag. Given Escondida makes up approximately 65% of BHP group copper production we do not expect a meaningful bounce in group copper performance until the heavy COVID impact on Escondida’s large workforce eases.
M&A. Post unification and divestments, we expect BHP to get active on the M&A hunt for larger acquisitions after simplifying its business and freeing up considerable capital resources and management capacity. If we had to guess, we would expect base metal acquisitions outside Australia as the most likely to hold some appeal (we also do not expect it to be in Africa which BHP exited when it spun off South32 in 2015). While not the bottom of the cycle by any means, we see it as the next logical step in BHP’s evolution consistent with its overarching strategy.
Forecast and valuation update
We have updated our forecasts for 2Q22, updated guidance, and applied updated house commodity forecasts (summary further). Higher commodity prices has driven the increase in our target price to (login to view).
Net of these changes our FY22 EPS declines 2.7% to US$3.49ps, with a forecast FY22 dividend of US$2.50ps (interim DPS of US$1.26ps).
BHP’s investment appeal has ebbed lower as its share price has rebounded off its October lows (when we upgraded our rating to Add), but despite this shrinking discount our confidence in the continuing upcycle for commodities has maintained our positive view on BHP.
We maintain our Add rating with a (login to view) target price.
Unification (20 Jan vote). Petroleum demerger (Q2’CY22). 1H22 result (15 Feb).
COVID impact to operations and metal demand drivers.
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