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BHP - lower commodity prices bring profits down

BHP has reported full-year revenue of $53.8bn, down 17% because of lower prices across iron ore, copper and metallurgical coal...

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BHP has reported full-year revenue of $53.8bn, down 17% because of lower prices across iron ore, copper and metallurgical coal. Lower revenue, as well as increased costs, meant underlying cash profit (EBITDA) was down 31% to $28.0bn.

Free cash flow, including the impact of $5.9bn spent on acquisitions, was down 77% to $5.6bn. Net debt rose $10.8bn over the financial year to $11.2bn.

Capital expenditure is expected to be around $10bn this year. And while broad-based inflation has eased, costs are still expected to remain elevated over the coming year.

A final dividend of $0.80 per share was announced.

The shares were broadly flat in early trading.

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Our view

BHP's performance took a big hit over the year, as prices for iron ore and copper came back down to earth. It's worth putting things in context though, a 31% drop in profit may signal warning signs but this was still one of the most profitable years since 2014.

Return on capital employed (a measure of how efficiently a company generates profits from its external funding) of 28.8% over the year is still impressive.

That doesn't mean it's all rosy though. Iron ore is BHP's cash cow, and while demand's been robust in China and India, the former is somewhat of a question mark. The Chinese reopening hasn't been as strong as some would like, and the unknown impact of recent stimulus policies is a short-term risk.

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 margins that tend to be higher than its peers. A decent place to be given costs are remaining stubbornly high.

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 $18.7bn, there's plenty in the tank.

Fundamentally BHP's investment case remains unchanged. Low cost, high margin assets are attractive and there's several medium-term growth drivers in the mix. Prices may not be as high as they have been, but there's still plenty of scope for solid returns. China remains a short-term question mark and BHP's premium valuation puts it first in the firing line if economic conditions, and commodity prices, end up worse than expected.

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
Senior 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: 22nd August 2023