Moody's Ratings gave BHP's (ASX:BHP) 2023-24 results a thumbs up, despite multi-billion-dollar impairment losses on its nickel business and involvement in the Samarco mine dam failure in Brazil nine years ago.
The impairments and weaker prospects for iron ore and copper led BHP to trim its interim and final dividends to US$1.46 per share, down from US$1.70 the previous year.
Simultaneously, the constraints from weaker prices, demand, and the nickel problems that forced the closure of the WA business and the massive loss did not deter BHP from investing heavily. The company invested US$9.3 billion in 2023-24, plans US$10 billion this financial year, and US$11 billion in 2025-26. A significant portion of this investment is earmarked for the Jansen Potash project in Canada, with smaller amounts allocated to rebuilding capacity at the BMA coking coal mines in central Queensland and copper expansion in South Australia and Chile.
The 2023-24 spending provides insight into the company's priorities. BHP generated US$11.9 billion in free cash flow after investing US$9.3 billion. It spent US$5.9 billion on organic development, including US$2.7 billion on copper projects, US$1.1 billion at Jansen, US$500 million on exploration, and US$3.0 billion on maintenance and decarbonisation expenditure.
Statutory net profit for the year ending June 30, 2024, fell 39% to US$7.9 billion (AU$11.7 billion) due to the US$2.7 billion write-down of its Western Australian nickel operations and the US$3.8 billion charge related to the Samarco dam failure. A pending court case in London could result in a significant judgment against BHP and Vale, its Brazilian partner.
However, excluding these one-off items, underlying profit increased by 2% to US$13.7 billion, surpassing analyst estimates of US$13.26 billion. Revenue rose by 3% to US$55.7 billion.
In a note issued on Tuesday, Saranga Ranasinghe, Vice President and Senior Analyst at Moody's Ratings, stated:
"BHP's results for the fiscal year ended June 2024 are credit positive. The group's underlying EBITDA and operating cash flow rose during the period despite an increase in unit costs across all major commodities. Improved earnings were supported by higher production and realised prices for both iron ore and copper. BHP's credit profile remains strong, supported by its low-cost asset base and conservative financial policies. We expect these strengths will continue to support BHP's peer-leading EBITDA margins and credit metrics in line with our tolerance levels for its ratings. The group's ongoing portfolio evolution combined with its decarbonisation efforts will require high capital spending. The group spent around USD9.3 billion in capital and exploration expenditure during the period with guidance for capital expenditure to remain elevated in the medium term. However, we continue to expect that BHP will carry out its major development spending in line with its net debt targets and conservative capital allocation framework. The group's credit profile reflects the uncertainty over the level of support BHP will need to provide to Samarco and potential payments the group may need to make. However, given the provisions already taken and the group's strong liquidity profile, we currently expect these future costs to be manageable within the rating parameters."
BHP itself cautioned that economic conditions are expected to remain challenging in 2024-25 due to ongoing geopolitical issues and their impact on global markets and trade. However, the company believes it is well-positioned to weather these challenges due to its portfolio of large, long-life, and high-quality assets.
CEO Mike Henry emphasised that the long-term fundamentals for BHP's products remain compelling but acknowledged near-term volatility in global commodity markets, particularly as China experiences an uneven recovery in its end-use sectors. China's economy continues to be crucial for BHP, as well as other major mining companies, the global lithium and EV industries, and the transition to low-carbon and renewable energy sources.
