1H18; iron ore quiet but others standout
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BHP Billiton has reported a satisfactory operational result for the first half 2018, with records however less prevalent. Western Australian Iron Ore was for once not leading with copper taking the lead. Petroleum was again a key laggard for the half. Copper may have turned the corner on a good first half, while the coal types struggled. Copper was not alone with a number of the lesser commodity exposures turning in nice cameo performances. Apart from metallurgical coal guidance for 2018, operational guidance for the full year was however maintained across the company’s other major commodity offerings. The following table is a synopsis of the company’s first half 2018 production outcomes:
Source: BHP Billiton
The company has, we believe, reported a satisfactory operational result for the first half, given trading conditions although turbulent have seen supportive commodity prices across the half.
WAIO was not the usual standout, while the lower petroleum result reflects the market conditions in the energy sector. Copper production stood apart from all the other major key commodity offerings and was joined by the small offerings in zinc and nickel. Both the coal types however struggled as market conditions remain fickle.
The iron ore operations turned in a flat half, following the reporting of a minor fall in overall production.
Iron ore production fell by 0.4% on the corresponding first half 2017, to 117.1 million tonnes. The following chart shows iron ore production:
Source: BHP Billiton
The performance of WAIO was impacted by the Wheelarra mine (BHP’s interest 85%) which reported lower production numbers for the half.
The site printed a 23% fall in production compared to the first half 2017, to 12.8 million tonnes, with production impacted by operational issues and infrastructure availability. As a partial offset, the company’s mainstay mine in Newman reported a healthy increase of 11.2% on the first half result 2017, to 35.8 million tonnes on infrastructure availability and efficiencies. The other mines reporting increased production included both the Yandi mine (BHP’s interest 85%) and the Jimblebar mine (BHP’s interest 85%) reported 7.7% and 3.4% increases respectively on the first half 2017, to 33.2 million and 11.2 million tonnes.
Mining at Samarco (BHP’s interest 50%) remains suspended.
Guidance for iron ore production in 2018 was maintained and is expected to fall into the range of 239 million to 243 million tonnes (100% basis) with WAIO forecast to be in the range of 275 million to 280 million tonnes (100% basis).
As a key product group, the company’s petroleum operations delivered a poor result for the first half 2018. Total production on a barrel of oil equivalent (boe) basis fell by 6.8% compared to the first half 2017, to 98.7 million boe. The following chart shows total boe production:
Source: BHP Billiton
The result for the first half was overall disappointing, given this product group can carry high margin and high asset values. The disappointment was more so, as the company was and is driving its petroleum operations to deliver optimal value. Both the oil and natural gas segments drove the lower overall petroleum result for the half.
Oil production fell 7.7% on the first half 2017, to 44.5 million boe. The following chart shows oil production:
Source: BHP Billiton
Within oil, the company reports on the activities of two segments in Onshore US and Conventional, with both segments driving the lower result for the first half. Onshore US reported an 11.7% fall on the first half 2017, to 14.5 million boe, while conventional printed a 5.8% fall, to 30.0 million boe. Infrastructure availability and natural field declines drove the lower result for the oil segment.
Natural gas reports in the same segments as oil, with Onshore US the major contributor to the fall in production for the first half. The following chart shows total natural gas production:
Source: BHP Billiton
Overall natural gas production fell 6.1% compared to the first half 2017, to 325.8 billion cubic feet (bcf). Of the constituents, Onshore US printed a fall of 14% on the first half 2017, to 121.9 bcf, with conventional falling a modest 0.7% for the same comparative period as Onshore US, to 203.4 bcf. Infrastructure availability, natural field declines and lower third-party demand drove the result.
The reduced Onshore US production is not a good operational outcome for the company, as it has been attempting to maximise production from these fields. This action was taken to justify the acquisition of these assets in 2011 for US$12.1 billion.
The company has maintained overall 2018 production guidance which is forecast to be in the range of 180 million to 190 million boe.
The constituents in Onshore US will contribute in the range of 61 million to 67 million boe and Conventional 119 million to 123 million boe, with both unchanged.
C
opper production was the standard for the half, following the printing of a 17% increase on the first half 2017, to 833,100 tonnes. The following chart shows copper production:
Source: BHP Billiton
Driving the copper result for the half was the company’s largest copper contributor in the Escondida mine (BHP’s interest 57.5%). Escondida reported a 29% rise in copper production compared to the first half 2017, to 582,800 tonnes. Behind the Escondida result was new processed copper from the Los Colorado extension, following the refurbishment and design to change the plant to allow for the simultaneous operation of three smelters. Dragging on the first half result was the performance of the Olympic Dam mine, following the reporting of a 30% fall on the first half 2017, to 54,200 tonnes. Planned plant maintenance drove the result with operations expected to return to normal from current levels. Copper guidance for Olympic Dam in 2018 remained unchanged at 150,000 tonnes.
The company has maintained 2018 guidance for copper with a forecast in the range of 1.7 million to 1.8 million tonnes.
The contribution by Escondida in 2018 has already been given above, with other copper expected to contribute in the range of 525,000 to 560,000 tonnes.
As a base metal the increased production in copper was met with rising market prices for the metal over the half. For the company its other base metal offerings in zinc and nickel also reported higher production outcomes with product going into higher market prices as well.
The following chart shows nickel production:
Source: BHP Billiton
Nickel production reported a 10.5% increase on the first half 2017, to 45,200 tonnes. Driving the result was the performance of the Kalgoorlie smelter on efficiency gains. Nickel production guidance for 2018 is forecast to be in line with 2017 production at around 85,000 tonnes. Zinc was also a standout with production rising by a significant 54% on the first half 2017, to 58,255 tonnes. No guidance is provided by the company for zinc production.
The coal types both struggled over the course of the first half 2018, with metallurgical (met) coal printing a fall and thermal coal flat-lining. Met coal production fell by 4.8% on the first half 2017, to 20.3 million tonnes, while thermal coal printed a 0.3% increase to 14 million tonnes. For met coal production was impacted by the scheduling of lower volumes on soft demand and unstable mining conditions. The company’s energy coal mines all operated as expected for the year.
Met coal guidance for 2018 was the only downgraded with production forecast to be in the range of 41 million to 43 million tonnes
from the previous 44 million to 46 million tonnes. Production guidance for thermal coal in 2018 remained unchanged in the range of 29 million to 30 million tonnes.
Turning to the daily chart, overhead resistance is situated at the January intra-month high of $32.16 as shown by the horizontal red line. However, it should be noted that the rapid increase in share price has resulted in the RSI to weaken from overbought territory (exhaustion of short-term upward momentum). Hence, should the bears maintain downward pressure over the near-term, then further weakness could potentially be on the cards, with initial support sighted at $30.50 (horizontal thin-blue line), followed by an additional layer evident between $28.82 and $29.17. This consist of structural support (horizontal dashed-blue line) and the 50-day moving average (red line) respectively. Positively, should this occur, we would view this short-term pause in trend as corrective. From a medium-term momentum perspective, this remains in favour of the bulls, as backed by the bullish moving average crossover present since August 2017. This is when the 50-day moving average (red line) crosses above the 200-day moving average (green line).
The overall production outcomes for the first half would tend to suggest to us that the operational result will have a positive impact on the underlying interim profit result to 31 December 2017.
In volume terms, we expect iron ore production will have a neutral impact and petroleum a negative impact. Copper and the other base metals and commodity offerings will be positive, albeit small. The two coal types in met and energy will have a negative impact as well, with met coal being the major contributor.
Moreover, repeating the
current operational momentum across the second half of 2018 will, in our opinion, result in a positive impact on the full financial results to 30 June 2018.
We look forward to its release.
The winner, in our view, out of the first half result is the average realised prices received, and these are shown in the following table for the company’s product offerings:
Source: BHP Billiton
A very pleasing aspect of the first half result is that the average prices received are overwhelmingly positive, and will therefore have a very positive impact on the company’s first half financials.
Furthermore, replicating these average realised price movements from the first half into the second half will only reinforce the positive price variance. We remain comfortable round the turn in the commodity price cycle, and expected to see prices over the course of 2018 remaining firm. The company will release its interim result for 2018 on 20 February 2018.
With reference to the monthly chart, after printing a low of $14.06 in January 2016, prices have spent the remainder of 2016 until January 2017 in a bullish-rotational mode. A short-term correction then ensued until June 2017, in which, has now terminated, due to support being respected at the 38.2% Fibonacci retracement of $22.64 (blue set of retracements). Moving forward, and over the broader term, we would expect prices to gravitate towards the next band of resistance situated between $33.37 and $38.62. This is made up of the 61.8% and 78.6% Fibonacci retracement levels respectively, as shown by the red set of retracements.
Our view on BHP Billiton has not changed as a result of the interim operational result. We believe the long-term tier 1 assets have the characteristics to allow the company to manage production and growth to create long-term value for its shareholders. Furthermore and importantly, the company has the financial capability to deliver this shareholder value across commodity cycles and over time.
Consequently, we recommend BHP Billiton as a high conviction buy for Members with no exposure to the stock.
Disclosure: BHP Billiton is held within the Fat Prophets Mining and Resources, Concentrated Australian Share and Concentrated UK Share portfolios.
