Falling Short

BHP Group released its December-quarter production report. Other than copper, production volumes were softer than expected. Car dumper maintenance in the Pilbara affected output, although shipments ran at a 276Mtpa rate versus FY20 guidance of 273–286Mt. The key results were as follows:

 

  • Iron ore shipments rose quarter-on-quarter (QoQ), but production fell due to maintenance. The upcoming March quarter is typically weak due to cyclones.

     

  • Copper production beat our estimate, rising 4%, with the key highlight being record concentrator throughput at Escondida. Costs are tracking below guidance due to strong gold by-product credits.

     

  • Metallurgical and thermal coal production improved QoQ after maintenance in 3Q19, but still missed our forecast.

     

  • Petroleum production was down 4% QoQ and against our estimate.

 

The 1H20 achieved iron ore price was US$78/t, about US$3/t higher than we expected (a 2% discount). We view this as a good outcome given lower grades from the Jimblebar operation. Overall, the better iron ore price offset lower than expected production.

 

FY20 guidance was unchanged, although the petroleum division is tracking to the lower end of the range due to North West Shelf maintenance, lower seasonal gas demand, and cyclone impact in the Gulf of Mexico.

 

Mike Henry commenced as CEO on 1 January. We expect that by the financial result on 18 February, Henry may be ready to announce some management changes. We have no insight into who will be staying or going, although we note new CEOs typically announce a new executive committee which usually results in some of the existing team leaving the business.

 

We reiterate our preference for Rio Tinto over BHP due to the former’s cheaper valuation metrics. However, we continue to believe little differentiates the investment case for both stocks as both have good balance sheets, a similar free cash flow yield of about 6%, pressure on consensus earnings to move higher given the strength in iron ore markets, and solid shareholder returns. We maintain our Hold recommendation on BHP with a $42.00 target price.

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