ii view: BHP keeps production estimates despite bushfires

Output should tick higher this year and the dividend remains attractive, but Chinese growth matters. 

First-half operational review to 31 December 2019

• All production and unit cost guidance remain unchanged for the 2020 financial year
• All major projects under development are tracking to plan

Chief executive Mike Henry said:

"We delivered solid operational performances across the portfolio in the first half of the 2020 financial year, offsetting the expected impacts of planned maintenance and natural field decline. Production and cost guidance is unchanged, and we remain on track to deliver slightly higher production than last year. Our six major development projects are progressing well, and we continue to advance our exploration programs in petroleum and copper."    

ii round-up:

Iron ore, copper and coal miner, BHP Group (LSE:BHP), reported first-half production numbers broadly in line with analyst estimates.

Despite the impact of Australian bushfires on December coal production, core products iron ore and copper enjoyed production increases of 2% and 7% respectively. 

Record production at its Western Australian Jimblebar mine helped fuel iron ore, while improvements in maintenance and operational performance at its Chilean Escondida mine underlay the upside for copper production. Iron ore and copper account for around 70% of group earnings. 

Energy coal production fell by 12%, largely the result of a change in product strategy, although also hindered by smoke from Australian bushfires and dust reduced air quality. 

Tropical Storm Barry in the Gulf of Mexico caused a 9% fall in petroleum production. 

The shares, and against a broader fall for the FTSE 100 index, were down by more than 2% in early afternoon UK trading. 

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, looks a sensible strategy.

For investors, a forecast two-year prospective dividend yield of around 5% (not guaranteed) generates attraction in the current low-interest rate environment. A forward price/earnings ratio (PE), marginally below the three-year average, also highlights possible value. However, BHP shares have significantly underperformed rival Rio Tinto (LSE:RIO) over five years, and strained US China trade relations plus a Chinese economy lacking clear growth momentum, do give some reason for caution. 

Positives

• Production expected to rise slightly this year
• Exposure to diverse portfolio of commodities
• Focus on shareholder returns

Negatives

• China’s growth rate at a 29-year low – a key market for BHP
• Currency movements can weigh on performance
• Operates five tailings dams that could cause severe damage and loss of life if they failed

The average rating of stock market analysts:

Hold