ii view: BHP holds forecasts for its key commodity

Covid-19 may reduce some production but management believes the business remains resilient.

Nine-month operational review to 31 March 2020

• Record iron ore production achieved in Western Australia
• Copper equivalent production was broadly unchanged
• Production guidance for 2020 remains unchanged for iron ore, petroleum & metallurgical coal
• Production guidance for copper and thermal coal under review due to Covid-19 
• Cutting capital expenditure for 2021

Chief executive Mike Henry said:

"We have implemented extensive measures across our operations to keep our people and communities safe from Covid-19. Working closely with relevant authorities and medical experts, strict travel and working practice arrangements have been established.

"We have delivered strong performance across the portfolio despite the impacts of planned maintenance, natural field decline and wet weather in Australia.

"While demand in China has strengthened in recent weeks, we expect other major economies, including the US, Europe and India, to contract sharply in the June 2020 quarter. The situation remains fluid, however, with our strong financial position and low-cost operations, our business is resilient, with capacity to generate solid cash flow through this period and emerge well placed as the global economy recovers."

ii round-up:

Mining mammoth BHP (LSE:BHP), which last month paid a half-year dividend worth $3.3 billion, today maintained full-year production estimates for iron ore, petroleum and metallurgical coal. But placed under review estimates for both copper and thermal coal as the spread of Covid-19 overshadows some production.

Its shares fell by more than 5% in early UK trading and are down by around 30% year-to-date. Rival Rio Tinto (LSE:RIO) last week cut its estimate for full-year copper production. Its shares have fallen by around 17% year-to-date.

The estimate for 2020 iron ore production was maintained at 273 to 286 million tonnes, while petroleum output is likely to hit the bottom end of its previous guidance of 110 to 116 million barrels of oil equivalent.

Iron ore is by far BHP’s most important product accounting for around two-fifths of sales and a large proportion of profit. Copper comes in next at around a quarter of sales, followed by coal at around one-fifth.

Only a small number of BHP’s 72,000 personnel had to date tested positive for Covid-19. 

Management outlined projections for steel production excluding China to possibly contract by a double-digit percentage in 2020. Capital expenditure in 2021 is now expected to be lower than its current forecast of $8 billion (£6.4 billion).

The group has six major projects under development with a combined budget of $11.4 billion (£9.1 billion) over the project’s lifetime and net debt of $12.8 billion (£10.2 billion) as of 31 December 2019. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties, the weather, not to mention trying to second guess the price direction of the commodity being extracted, can all impact financial performance. 

For BHP specifically, a focus on portfolio simplification, cash generation and capital discipline delivering higher cash returns to shareholders, we believe, have looked sensible. Covid-19 now brings another major challenge. 

For investors, production guidance cuts underline the threat from the pandemic. Cautious management comments regarding product demand from areas of the world such as the US, Europe and India also cannot be ignored. More favourably, industry lessons learned post the 2008 financial crisis should leave BHP better positioned to tackle the corona crisis. For now, and despite a focus over recent years on shareholder returns, a Covid-19 world places potential returns under a shadow, if only a small one for now, with a wait and see approach arguably most sensible. 

Positives

• Exposure to a diverse portfolio of commodities
• Focus on shareholder returns

Negatives

• Production guidance for copper and thermal coal under review 
• China’s economy shrank in Q1 2020 – a key market for BHP

The average rating of stock market analysts:

Buy