As expected BHP Billiton has fallen short of its 2016-17 iron ore production targets but has topped its full year guidance for petroleum, copper and coking coal.
But in a surprise, the company upped its 2016-17 forecast for iron ore, but slashed that for its petroleum division, in its 2015-16 production report (http://www.bhpbilliton.com/~/media/bhp/documents/investors/reports/2016/160720_bhpbillitonoperationalreviewfortheyearended30june2016.pdf) BHP’s share of its iron ore exports was 227 million tonnes in the year to June, below the revised guidance of 229 million tonnes.
That target was initially as high as 237 million, but the Samarco dam disaster in Brazil and weather problems at its Pilbara mines in WA saw output dip under the lowered guidance.
BHP was originally supposed to ship 270 million tonnes from Western Australia in the 2016 financial year (including tonnage owned by joint venture partners) but downgraded that target to 260 million tonnes after weather and rail maintenance interrupted operations in the March quarter.
It fell just short of that target too at 257 million tonnes. But yesterday it said that WA iron ore guidance for the coming financial year had been raised from 265 to 275 million tonnes above analyst expectations, and much stronger than the maintained (but lower) guidance from Rio Tinto yesterday.
And BHP said its WA iron ore production capacity will hit 290 million tonnes in 2018-19, more than 10% above 2015-16’s figure, hinting at another increase.
BHP said 4th quarter iron ore production fell 7% to 56 million tonnes in the three months to June, helping produce the lower outcome for the year. That news saw the company’s shares fall more than 4% at one stage yesterday. They ended the day down 23.9% at $19.25.
And while there was better news in the petroleum division for 2015-16, the outlook for the coming financial year saw a big whack taken out of its forecasts.
BHP produced 240 million barrels of oil in the year to June 30, just above the 237 million barrels of oil equivalent that BHP had promised.
But the company signalled a 15% drop in oil and gas production this financial year, its second straight annual fall, as it cuts spending and reduces drill rigs at the US shale operations, especially shale gas.
There was no sign yesterday of any confidence at BHP that the recent rebound in US gas prices was anything but temporary and not worth risking spending more money on after outlaying $US35 billion so far (plus costs) and taking a $US25 billion hit to the balance sheet as a result. There was in fact talk of improved demand in the “medium to long term” only.
BHP Billiton CEO Andrew Mackenzie said in yesterday’s statement that “Over the next 12 months, we expect volumes and costs across our minerals businesses to benefit from our continued drive to safely improve productivity.
"We can create significant value through further cost reductions, taking advantage of latent capacity in our assets and investing in low-capital projects. These initiatives are expected to grow production by five per cent in copper, up to four per cent in iron ore and three per cent in metallurgical coal in the next financial year.
“In Petroleum, we have delivered strong performance from our Conventional assets and responded to market conditions by reducing the number of rigs in our Onshore US assets as we focus on cash flow and value.
"We have taken advantage of the fall in deep water drilling costs and accelerated our conventional oil exploration program to simultaneously run campaigns in the Gulf of Mexico and the Caribbean. We are well positioned to bring on shale volumes as markets tighten and develop conventional resources over the medium to long term,” he said.
The group did, however, outperform its copper forecasts. Copper production of 1.58 million tonnes was not only better than guidance, but better than analysts had expected.
And BHP also revealed a net $US175 million hit to underlying profit owing to a number of small impairment and restructuring charges.
BHP said it expects more write-downs, mainly in its coal business, to cut between $US75 million to $US150 million from underlying profit in the 2016 June half year, while redundancy costs will shave another $US25 million to $US75 million
And yesterday’s production report included an exceptional item relating to “global taxation matters” estimated at between US$150 and US$200 million in the June half year. The company said this includes potential litigation and tax-related amounts.
On the plus side, BHP said it expects it will reverse some previous write-downs across all its minerals businesses, reflecting the small rebound in commodity prices. That will total between $US50 million and $US100 million.
And still more losses on the cost of the Samarco disasterlclean up and fines.
“We are not yet in a position to provide an update to the potential financial impacts on BHP Billiton Brasil of the Samarco dam failure,” BHP said yesterday in the production update.
“We are continuing to work closely with Samarco and will provide an update as soon as we are in a position to do so.
“Any potential financial impacts related to the tragedy are expected to be classified as an exceptional item.”
In February, BHP revealed a loss of $US5.669 billion, in part due to the Samarco disaster (and the slide in global commodity prices and demand).
That figure included a pre-tax impairment of $US1.188 billion or $US858 million after tax for its investment in the Samarco mine. There will be more in the full year profit out in a month’s time.
