BHP Group

BHP

January 24, 2024 FAT-AUS-1026
46.86
Core
medium

BHP Snapshot

BHP Group
Latest Closing Price: 46.86
BHP Group Limited is an Australia-based resources company. The Company is a producer of commodities, including iron ore, copper, nickel, potash, metallurgical (steelmaking) coal. It is focused on offering a range of resources, which provides copper for renewable energy; nickel for electric vehicles; potash for sustainable farming, and iron ore and metallurgical coal for the steel needed for global infrastructure and the energy transition. Its segments include Copper, Iron Ore and Coal. Its Copper segment is engaged in mining of copper, silver, zinc, molybdenum, uranium and gold. Its Iron Ore segment is engaged in mining of iron ore. Its Coal segment is engaged in mining of metallurgical coal and energy coal. The Company's operations are situated in approximately 90 locations, including Australia, Europe, China, Japan, India, South Korea, rest of Asia, North America and South America.
Market Capitalisation: 237.52b
FY1 FY2
Price to Earnings: 12.1 11.2
Dividend Yield (%): 5.6 5.1
Price to Book: 3.5 3.1
Return on Equity (%): 28.9 27.6
EV/EBITDA: 6.1 5.7

A Nickel Thorn on the Side

Shares in the Big Australian, BHP (ASX.BHP), announced lower full-year production guidance in the Queensland coal operations after a “tough six months” for the 1H24 period. Another headache for management is the substantial dip in nickel prices – falling nearly 50% – following an increase in nickel exports from Indonesia, fuelled by Chinese investment. The weakness in nickel prices has pushed management to evaluate options at the Nickel West operations in WA; we expect an update next month.

Before moving on to the quarterly update, a quick look at the technicals and after encountering resistance at $50, BHP has corrected back toward the primary uptrend that has been in place since 2020. Whilst the stock could go lower, the primary uptrend should hold. Below $45, BHP is in buying territory. Iron ore prices should soon find a floor.

2Q24 Trading Update

Starting from the top, BHP experienced a strong first half in copper, iron ore, and energy coal but faced challenges in metallurgical coal.

In terms of operational performance, the highlights are:

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WA Iron Ore production increased by 5% quarter-on-quarter, and first-half copper production rose by 7%. NSW Energy Coal had its best first half in five years. BMA (metallurgical coal) had a tough six months due to planned maintenance and low starting inventories. Nickel West is evaluating options to mitigate the impacts of a sharp fall in nickel prices.

Source: BHP 2Q24 Filing

On specific segment performance, starting with Copper. Total copper production increased by 7% to 894 kt. Escondida, Pampa Norte, and Copper South Australia contributed to the growth. Spence recorded a half-year production record, but Cerro Colorado entered temporary care and maintenance.

Next, Iron Ore. Total iron ore production decreased by 2% to 129 Mt. Lower production in WAIO due to tie-in activity for the Rail Technology Programme and ongoing ramp-up in the Central Pilbara hub. Samarco production increased by 13% due to higher concentrator throughput.

While for Coal, BMA production increased by 17% to 11.3 Mt but faced challenges, including a fatal incident at Saraji mine. NSW Energy Coal production increased by 36% to 7.5 Mt. Full-year production guidance for BMA lowered to between 23 and 25 Mt. NSW Energy Coal production guidance for FY24 expected to be at the upper end of the range of between 13 and 15 Mt.

Moving on, BHP also highlighted challenges in Nickel operations. While iron ore and copper prices have been impacting BHP’s revenue, nickel, a smaller percentage of its revenue, is causing additional concerns. There was the fact that Nickel fell 50% year-on-year. The nickel industry is experiencing structural changes, with increased supply from Indonesia contributing to a decline in nickel prices.

There is a call for a more transparent pricing mechanism that distinguishes between clean and dirty nickel, particularly as the environmental impact becomes a significant consideration, especially in the electric vehicle (EV) market.

For the quarter, BHP notes quarterly nickel production increased by 4% to 40,000 tonnes, but the average realized price dropped by 24% to US$18,602/tonne.  BHP acknowledged that the nickel industry is undergoing structural changes and is facing a cyclical low in realized pricing.

That and BHP is actively optimizing operations and evaluating options to counter the challenges posed by the sharp fall in nickel prices. Management is conducting a carrying value assessment of its nickel assets under existing market conditions, with further details expected in the financial results release next month on February 20.

Nickel West, a key part of BHP’s nickel operations, is actively exploring options to mitigate the impact of the significant decline in nickel prices. BHP Nickel West Asset president Jessica Farrell highlighted the tough operating environment, with rising costs and falling Nickel prices. Nickel West is described as a complex business involving underground mining, third-party supply, on-site smelting, downstream refining, and a multi-stage supply chain.

Meanwhile, BHP has decided to pause part of its Kambalda processing operations in Western Australia, following Wyloo’s decision to place several nickel mines under care and maintenance.

Going forward, management has kept production guidance for FY24 unchanged for most assets, except BMA, which lowered its production guidance. Unit cost guidance increased for BMA to between US$110/t and US$116/t due to lowered production guidance.

Summary

BHP’s operational review highlights a mix of strong performance and challenges across its key segments. While copper, iron ore, and energy coal showed positive results, metallurgical coal (BMA) faced difficulties. The fatal incident at Saraji mine is a tragic event, and BHP is committed to learning from it.

The growth agenda is progressing, with the ongoing construction of the Jansen mine and the sanction of Jansen Stage 2. Exploration drilling beneath Olympic Dam has identified promising copper mineralisation.

Financially, production guidance remains stable for most assets, except BMA, where production guidance was lowered. Unit cost guidance for BMA increased due to the lowered production outlook.

In the meantime, while we wait out further improvements to the commodity prices, we maintain our HOLD rating on BHP.

Disclosure: Interests associated with Fat Prophets hold shares in BHP.


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