BHP Billiton released its first-quarter FY18 production report. Despite the mixed results, full-year production and unit cost guidance was unchanged. We maintain our Hold recommendation on BHP with a target price of $29.00.
- The key Western Australia Iron Ore (WAIO) division, which accounts for about 60% of earnings, had a weak start to the year, with production and shipments running at 255Mtpa and 251Mtpa, respectively. The 9%/12% QoQ decline was attributed to maintenance, port debottlenecking and low stocks. The company will need to perform well through the remainder of the year to catch up to full-year guidance of 275–280Mt. There was no update on Samarco (Brazil).
- Copper production was ahead of our forecast, supported by a ramp-up of Escondida (Chile) throughput – up 28% QoQ to a 96Mtpa rate – while grades were stable at 1.1%. BHP expects production to ramp-up to full capacity in the December quarter, enabling utilisation of the three concentrators. Full-year guidance for Escondida remains for 1.13–1.23Mt, in addition to 525–560,000t from its other copper operations, at Pampa Norte (Chile), Antamina (Peru) and Olympic Dam (South Australia).
- Metallurgical coal and thermal coal production missed our forecasts slightly. Increased production at the Saraji (Queensland) metallurgical coal and NSW energy coal mines was offset by lower output at Broadmeadow (Queensland) and the impact from unfavourable weather at Cerrejón (Columbia). Full-year guidance remains unchanged at 44–46Mt for metallurgical coal and 29–30Mt for thermal coal.
- Petroleum production was lower than the previous quarter, with Hurricane Harvey and natural field decline across the portfolio reducing petroleum volumes during the period. The company reiterated full-year production guidance of 180–190mmboe.
Our earnings forecasts have reduced as we have incorporated our revised currency estimates and higher freight costs, offset partly by higher lump premiums.
Rio Tinto (RIO, Accumulate) continues to screen slightly cheaper than BHP on valuation, although we acknowledge the difference is becoming marginal and could close following the full disposal of the Onshore US assets. In the meantime, we maintain our Hold recommendation on BHP.