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BHP Group - lower commodity prices bring profits down

BHP reported half year revenue of $25.7bn, down 16%.

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BHP reported half year revenue of $25.7bn, down 16%. The decline was largely caused by lower prices of both iron ore and copper. Production was higher for both, 2% and 12% respectfully.

Underlying cash profit (EBITDA) fell 28% to $13.2bn. Lower prices were the main factor, along with the impact of higher costs.

Free cash flow fell from $9.7bn to $3.5bn. Net debt rose from $0.3bn to $6.9bn since the start of the year.

Mike Henry, CEO, expects ''domestic demand in China and India to provide stabilising counterweights to the ongoing slowdown in global trade and in the economies of the US, Japan and Europe.''

An interim dividend of $0.9 per share was announced.

Shares were down 2.4% in early trading.

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Our view

BHP's performance took a big hit over the first half, as prices for iron ore and copper came back down to earth. It's worth putting things in context though, a 30% drop in profit may signal warning signs but this was still one of the most profitable half years on record.

Return on capital employed (a measure of how efficiently a company generates profits from its external funding) of 29.4% over the first half is still impressive.

That doesn't mean it's all rosy though. The challenging global environment is expected to weigh on demand in the US, Japan, and Europe. The good news is that a reopening in China and strong demand in India should act to balance the scales.

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.

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. It's a hefty investment though, and execution risk is high.

As is often the case with a cyclical business, as profits drop so do shareholder returns and that's what we're seeing. But with a dividend policy that targets a minimum payout ratio of 50% and net operating cash flow of $6.8bn, there's plenty in the tank.

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. Prices may not be as high as they have been, but there's still plenty of scope for solid returns. That's reflected in the above average valuation, which adds pressure to deliver and there are no guarantees.

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.

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
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: 21st February 2023