BHP Group Plc (BHP) Ordinary US$0.50
HL comment (16 February 2021)
BHP reported half year profits of $3.9bn, compared with $4.9bn last year. The decline reflects non-cash charges relating to the reduced value of coal assets, as well as costs associated with Covid and the Samarco dam failure. Excluding these items, on an underlying basis, BHP made $6.0bn in profit, compared with $5.2bn last year, thanks to higher prices and a "strong operational performance".
The board announced a $1.01 interim dividend, which is a group record and represents 85% of underlying profits.
The shares rose 0.8% following the announcement.
It's been a rocky year for commodities, and BHP's not escaped unscathed. However, the year has also underlined many of the group's fundamental strengths.
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 cost BHP $14.38 produce in the half year ending 31 December, well below the average price of $103.78 received. It's a similar story across much of the rest of the group - and that's meant only the coal division failed to make positive underlying cash profits in the last half.
BHP's high quality, high margin assets meant that, even the bulk of its mines remained robustly profitable throughout the year. Lower market prices still mean lower profits, but with debt and central costs kept under control, BHP was able to weather the storm.
But we're not necessarily out of the woods just yet though. Commodity prices have rebounded recently, but that may not continue. If the world economy fails to recover as smoothly as hoped, prices for industrial raw materials could still falter. BHP is among the better placed miners, but this would still be a blow.
BHP targets paying out a minimum of 50% of earnings as a dividend, which in a highly cyclical industry is a sensible approach. However, it also means that payments to shareholders will likely rise and fall with global commodity markets. BHP has actually paid out significantly more than this recently, so the current level may not be maintained.
To be fair to BHP, debts look very manageable and that provides flexibility. If you can keep debts low while still paying a healthy dividend, why wouldn't you? Nonetheless, the allocation of cash between balance sheet, capital expenditure and shareholders is an area we'll be paying close attention to.
Overall, we think BHP's asset base means it should be well placed to weather the ups and downs of commodity markets. The current price to book ratio of 2.9 is a way ahead of the long term average, though, so if conditions sour investors could be in for a bumpy ride.
BHP key facts
- Price/Book ratio: 2.9
- 10 year average Price/Book ratio: 1.8
- Prospective dividend yield (next 12 months): 5.7%
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.
Half Year Results
Underlying cash profits in Petroleum halved to $789m thanks primarily to lower prices. However, volumes also fell, in part thanks to lower gas demand at Bass Strait and North West Shelf and hurricanes in the Gulf of Mexico. Unit costs rose 8% to $10.30 per barrel of oil equivalent, and are expected to be between $11 and $12 for the full year.
Copper cash profits rose by $1.4bn to $3.7bn, mostly thanks to higher prices. Unit costs at Escondida, which accounts for the vast bulk of the division's production, fell 18% to $0.90 per pound, reflecting record concentrator throughput and lower deferred stripping costs. Full year guidance is for unit costs between $1.0 per pound and $1.25 per pound.
Iron Ore cash profits rose $3.1bn to $10.2bn, again mainly reflecting higher prices but also record production at Western Australia Iron Ore (WAIO). Unit costs at WAIO rose 10% to $14.38 per tonne and are expected to be between $13 and $14 for the full year.
The Coal division made a $201m cash loss compared with an $898m profit last year. The fall was mostly due to lower prices, but lower volumes also contributed. Queensland Coal unit costs rose 20% to $85 per tonne and are expected to be between $69 and $75 for the full year.
BHP generated $5.2bn in free cash flow after capital and exploration expenditure of $3.6bn. This contributed to a 7% reduction in net debt to $11.8bn.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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