ii view: BHP is strong as iron

Despite Covid uncertainty, should investors be looking towards China and a potential dividend payment?

Fourth-quarter production to 30 June

• Iron ore production up 7%
• Petroleum down 11%
• Copper down 7%

Chief executive Mike Henry said:

"BHP safely delivered a strong operational performance in the 2020 financial year, achieving record production in a number of our operations, and an improved cost base. This performance, achieved in the face of Covid-19 and other challenges, is a result of the outstanding effort of our people and the support of our communities, governments, customers and suppliers. 

"Our diversified portfolio and high-quality assets, together with our strong balance sheet, make us resilient to the ongoing uncertainty in the markets for our commodities. We expect to continue to generate solid cash flow through the cycle and we remain confident in the outlook for demand for our products over the medium to long-term."

ii round-up:

Mining giant BHP (LSE:BHP) reported a 7% increase in fourth-quarter iron ore production, but widened its production estimate for the year ahead given ongoing pandemic uncertainty. 

Full-year iron ore output, which accounts for around two-fifths of total sales, rose by 4% to 248 million tonnes. Production for the year ahead is now expected to range between 248 and 253 million tonnes, 2% wider than its previous estimate.

BHP shares fell by more than 1% in early UK trading, leaving them virtually unchanged year-to-date. Australia-focused Rio Tinto (LSE:RIO) has seen its shares rise by 10%, while South Africa-focused and coronavirus-hit Anglo American (LSE:AAL) has seen its shares fall by 10%.

Copper, accounting for around a quarter of BHP's sales, enjoyed a 2% increase in full-year production, although final quarter output fell by 7%. Petroleum, generating just over a tenth of total sales, suffered 10% and 11% falls in both full-year and final quarter production respectively. 

BHP has six major projects under development in petroleum, copper, iron ore and potash. Its Australian workforce had to date only suffered a small number of Covid-19 cases, none with workplace exposure. 

Accompanying management comments highlighted contrasting major economic fortunes during the final quarter to the end of June. The US, Europe and India had suffered, while China had moved from intensive viral suppression to economic recovery.

Overall, broker Morgan Stanley estimated a modest increase to its adjusted profit estimate for 2020, but a 3% downgrade for its 2021 year ahead estimate. 

In March, BHP paid an interim dividend of $0.65 per share. For the full year 2019 it paid a total dividend of $2.35 per share, including a special dividend of $1.02 per share, up from a total of $1.18 in 2018. 

Full-year results to the end of June are expected in mid-August. 

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 have looked sensible. Covid-19 now brings another major challenge. 

For investors, previous production guidance cuts and today’s widening of estimates for 2021 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. China’s highlighted economic strength as it potentially emerges from the pandemic first, is significant. Just over half of group sales go to China. 

The uncertain global economic outlook and potential for a second virus wave still leave investors requiring a sizeable measure of caution, especially given BHP shares have surged since March. However,  a forecast dividend yield in the region of 5% cannot be overlooked, if paid.

Positives

• Exposure to a diverse portfolio of commodities
• A previous focus on shareholder returns

Negatives

• Outlook uncertainty regarding Covid-19 overhangs 
• China’s economy shrank in Q1 2020 – a key market for BHP

The average rating of stock market analysts:

Buy