Despite sharp falls in revenue, earnings and dividends for the December half year, BHP Group CEO Mike Henry remains pretty upbeat about the rest of the financial year and into 2024.
BHP Group Ltd reported a 32.1% drop in first-half profit on Tuesday, to a lower-than-expected $US6.5 billion ($A9.4 billion) thanks to weak iron ore prices and sharply higher costs.
That was on a 16% slide in revenue for the half to $25.71 billion.
The company, which is in the process of taking over copper and gold producer OZ Minerals for A$9.6 billion, cut interim dividend 25% to 90 US cents from $US1.50 per share a year earlier.
While BHP battled the impact of the now abandoned zero Covid policy of President Xi Jinping and surging inflation and costs (especially energy), it now sees a bounce back in China and commodity prices.
“We are positive about the demand outlook in the second half of FY23 and into FY24, with strengthening activity in China on the back of recent policy decisions the major driver, Mr Henry said in the statement, repeating sentiments he made earlier in the year in the company’s half yearly production report.
“We expect domestic demand in China and India to provide stabilising counterweights to the ongoing slowdown in global trade and in the economies of the US, Japan and Europe.
“The long-term outlook for our commodities remains strong given population growth, rising living standards and the metals intensity of the energy transition, including for steel making raw materials.”
Iron ore remains the key for the company (and Rio Tinto, which reports its 2022 full year profit on Wednesday) and the global benchmark price hit 8-month highs of more than $US128 per tonne for 62% Fe fines on the Singapore Exchange on Monday. That’s up around 50% since the lows of late October in the mid $US80 a tonne range.
Mr Henry said the lower dividend of 90 cents came “on the back of (a) solid operating performance”.
BHP said there was a “Strong supply chain performance at Western Australia Iron Ore (WAIO) underpinned record half year production and our continued leading C1 unit cost position of US$15.50 per tonne.”
“Profit from operations of US$10.8 billion, down 27%, driven by a US$4.8 billion reduction in revenue which largely reflects lower iron ore and copper prices.”
BHP said that it underlying EBITDA of $US13.2 billion at a very strong gross margin of 54%, the company’s capital and exploration spending in the half was $US3 billion and guidance for the full year remains unchanged at $7.6 billion as it pushes the first stage of the Jansen potash project in Canada towards completing in 2024 and first production now set for 2026 instead of 2027.
“We have commenced a feasibility study for Jansen Stage 2, which we expect to be completed during the 2024 financial year.” the company added.
It revealed what it called that it had expanded its “opportunities in future facing commodities through additional drilling at Oak Dam” in South Australia. Oak Dam is a starting to look like a smaller version of rich Olympic Dam mine, also in South Australia.
BHP said it had net debt at December 31 of $US6.9 billion, “towards the bottom of our target range of between $US5 and $US15 billion.”
The shares eased $0.3% to $48.30.
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BHP’s cost pressures saw the company single out the price of diesel fuel across its operations as a big problem, along with wet weather (for Queensland and NSW coal) and labour shortages.
“We continue to see the lagged impact of inflationary pressures, in particular for diesel, with an effective inflation rate of approximately 12 per cent,” the company said in Tuesday’s release.
“Across the Group, inventory movements were also a significant driver of higher unit costs during the period, as a result of both planned drawdowns of stockpiles and the consequences of labour availability challenges and significant wet weather.
“Outside of these factors, our focus on cost discipline has allowed us to effectively manage in the current environment.”
Unit costs at West Australian Iron Ore “were above guidance at the half year (based on guidance exchange rates of AUD/USD 0.72) primarily due to the drawdown of mine inventories as a result of labour availability, and the impact of inflation, particularly for diesel.”
Unit costs at its BHP Mitsubishi Alliance (BMA) coking coal joint venture in Queensland “were above the revised guidance range at the half year (based on guidance exchange rates of AUD/USD 0.72) primarily due to significant wet weather impacts on production during the first half, inventory movements and inflationary pressures.”
“A stronger second half performance is expected following planned maintenance undertaken in the first half but remains subject to further potential wet weather impacts.”
And still on BMA, BHP also revealed that it was looking to sell two of its weakest operations – Daunia and Blackwater.
BMA is half owned by BHP with Mitsubishi owning the other half.
Since 2021, the company has sold off one of its last-remaining thermal coal mines, a series of metallurgical coal mines and its entire global oil and gas division.
BHP’s remaining coal assets include the Mount Arthur thermal coal mine in the NSW Hunter Valley, which it plans to close in 2030, and the nine coking coal mines it owns through BMA in central Queensland.
In Tuesday’s report BHP inferred quite strongly that the two mines were not good enough for further investment.
“Whilst high quality assets with growth potential, the Daunia and Blackwater mines would struggle to compete for capital under our capital allocation framework, including given our choices for deploying capital globally, and we are seeking to divest these assets to an operator who is more likely to prioritise the necessary investments for continued successful operation. We will look to maximise the value of these assets via trade sale,” BHP said.
Blackwater produces around 18 million tonnes of coking and thermal coal a year and Daunia produces around 4 million tonnes a year.
