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BHP - Coal division drives record profits

Over the year, BHP grew revenue from $56.9bn to $65.1bn.

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Over the year, BHP grew revenue from $56.9bn to $65.1bn. That was driven by a large increase from the Coal division, offsetting a drop from Iron Ore. Excluding contribution from the now sold Petroleum business, underlying operating profit rose 15% to $34.4bn.

The board has declared a final dividend of $1.75 per share, taking full year distributions to $3.25. That was 8% higher than the previous year. The group also paid out an additional $3.86 per share in June, due to the merger of BHP's petroleum business with Woodside.

The shares rose 4.1% following the announcement.

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Our view

Iron ore and copper might make up 80% of BHP's sales, but it's the coal portfolio that's been the real driver of profit and cash flow over the last year. A shift to high quality coal meant BHP was able to fully capitalise on higher prices, more than offsetting some weakness in iron ore.

The result, record return on capital employed (a measure of how efficiently a company generates profits from its external funding) of 48.7%.

That doesn't mean it's all rosy though. Higher inflation around the globe not only means costs are up, but central banks have had to act with interest rate rises. That has the knock-on effect of weakening global demand for commodities, which is expected to impact trading into the next year. That's part and parcel with being a miner though, cycles come and go.

On the cost side at least, BHP has some aces up its sleeve. Western Australia Iron Ore, which produces the bulk of the group's iron ore, has some of the world's lowest production costs. The same can be said for the Escondida copper mine in Chile. That feeds into high margins which should hold up better than some peers if costs continue to rise.

Looking to the future, BHP's focused on capitalising on the energy transition. Expanding operations in copper and nickel are key drivers of future growth. But for now, the bulk of the investment is going into decarbonising existing operations, expanding iron ore production at existing sites and bringing the Jansen project online.

The Jansen project is set to deliver one of the world's largest Potash mines. Potash, a naturally occurring mineral fertiliser, is a little different to the group's other assets - since farmers need it regardless of the economic climate.

The initial stage is nearing completion, which involves excavating and preparing the mining shafts - at an estimated cost of nearly $3bn. That's meant the larger 'Stage 1' can begin, with an estimated cost of $5.7bn, it involves the building of the potash mine itself.

This is a real growth area for the business, and a strategic shift that should provide shelter from more cyclical commodities. BHP's pushing to get first production into 2026, a year earlier than previously thought. It's a hefty investment though, and execution risk is high.

BHP's taking advantage of the good conditions to reduce debt and pay out 77% of earnings as a dividend. With a strong balance sheet and huge free cash flows, shareholder returns can remain generous if the group chooses. Though remember, returns will rise and fall as the wider commodity environment moves through the cycle.

Fundamentally BHP's investment case remains unchanged. Low cost, high margin assets mean the bulk of its mines should remain profitable in most market conditions. That, plus accommodative conditions, is somewhat reflected in a valuation that's ahead of the longer-term average and the wider sector, which increases pressure for BHP to perform well.

BHP key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results

Copper revenue rose from $15.7bn to $16.8bn, as higher copper average realised prices offset a drop in volumes. At the flagship Escondida mine, revenue was broadly flat, but costs rose 20% to $1.2/lb. That's expected to rise further over the next year, to $1.25-1.45/lb as inflationary pressures kick in. Underlying operating profit fell from $6.8bn to $6.3bn.

Iron Ore saw revenue fall from $34.5bn to $30.8bn, driven by a 13% drop in average realised price. Western Australia Iron Ore, responsible for almost all the group's Iron Ore output, saw costs rise 13% to $16.81/tonne. That fed into divisional operating profit which fell from $24.3bn to $19.5bn.

Coal was the standout, with revenue 3 times higher at $15.5bn. That was driven by average realised coal prices that more than tripled across the range. Higher costs due to inflationary pressures were more than offset by the higher revenue and underlying operating profit of $8.7bn was up from a loss of $577m last year.

Free cash flow, including the petroleum business, improved from $19.4bn to $25.2bn That helped net debt fall from $4.1bn to $333m.

Capital and exploration expenditure was a touch higher, going from $7.1bn to $7.5bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 16th August 2022