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BHP Group - poor production hits profits

George Salmon | 19 February 2019 | A A A
BHP Group - poor production hits profits

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BHP Group Plc Ordinary US$0.50

Sell: 1,764.00 | Buy: 1,764.20 | Change -16.80 (-0.94%)
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BHP Group had warned investors that production outages at four sites would impact profits before these interim results, but results are still slightly below consensus forecasts.

The shares fell 1.6% on the news.

The interim dividend is held at $0.55 cents per share.

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Our view

Big diversified miners may look pretty grizzly, but in actual fact they're reassuringly simple. It's all about how much they can dig up, and the difference between what it costs to extract the raw materials and the prevailing market price.

Iron ore is BHP's most important commodity by some way, and its high quality assets mean extraction costs are very low. A tonne of iron ore costs BHP as little as $14.51 a tonne, well below the average price of $55.62 received in the last six months. It's much the same story across the rest of the group, including in its expanding copper business.

This should make BHP a giant cash machine, but it's proving a struggle to keep a lid on costs while ramping up production. It doesn't help that the group's got plenty of exposure to factors outside its control. When commodity prices crash, they crash everywhere, for everyone. Anyone holding the shares through 2014/15 will know that only too well.

Those high quality assets mean that even at the bottom of the cycle, BHP's mines were robustly profitable. Unfortunately it also had a mountain of debt going into the downturn, which meant it had to slash the 'progressive' dividend policy and focus on repairing the balance sheet.

These days, BHP targets paying out a minimum of 50% of earnings. In a highly cyclical industry, this seems a more sensible approach. The worry is BHP has actually paid out significantly more than that, so one might be forgiven for wondering if it that much has really changed.

To be fair, debts look a lot more manageable, and if you can deleverage while still paying a healthy dividend, why wouldn't you? That's a reasonable argument, but the allocation of cash between balance sheet and shareholders is still an area we'll be paying close attention to in the future.

Analysts are forecasting a 5.5% prospective yield this year. That comes after the buyback and special dividend paid following the sale of the onshore US business to BP.

The sale sharpens the focus on the core mining businesses, and BHP's asset base means it should be well placed to weather the ups and downs of commodities. Assuming of course that management don't overcommit on the dividend, or get overconfident on debt levels.

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Half year results details

BHP's revenue rose slightly to $20.7bn, but a $1.3bn drop in cash profits from the copper business more than offset progress elsewhere, bringing after-tax profits from continuing operations down 8% to $3.7bn.

While average realised price dipped slightly to $55.62 a tonne, iron ore cash profits as measured by EBITDA (earnings before interest, tax, depreciation and amortisation) rose slightly to $4.3bn as unit costs fell and production rose.

Elsewhere, higher realised prices helped both the petroleum and coal divisions. Petroleum EBITDA rose 38.3% to $2.3bn, with coal up 13.1% to $2bn.

Total capital and exploration expenditure rose 21.7% to $3.5bn, with higher spending in all divisions. Guidance is unchanged for annual spending of up to $8bn in the 2019 and 2020 financial years.

While operating cash flow was stable at $7.3bn, net debt fell $1bn to $9.9bn. That reflects the receipt of $7bn from the sale of onshore oil assets, partially offset by the completion of a $5.2bn share buyback and unfavourable foreign exchange movements.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.