BHP: Outages Impact Production – 1st Half 2019 Operational Results

Bottom Line

• BHP’s (NYSE: ) management has reiterated that it is on track to achieve fiscal year 2019 production and cost guidance from all of its major divisions: petroleum, iron ore, metallurgical coal, and energy coal.
• On a copper equivalent basis December 2018 half-year production was in line with the previous year.
• Planned maintenance and production outages impacted unit costs for the half year — the company announced earlier that it took a $600 million hit from these outages.

Our Take

• We believe BHP’s lacklustre production growth profile across its commodity verticals makes the company a middle-of-the-road investment opportunity.
• The capital upside in the company will be driven by global GDP growth as a function of diversified commodity mix, something that we’re much more sanguine about.
• We do, however, believe the company has the financial flexibility to defend its attractive 4.7% dividend yield.

BHP Divisional Highlights

Oil & Gas

In the half, realized crude oil pricing was up 29% y/y, while natural gas pricing was up 12% y/y, at $69/bbl and $3.98/Mscf respectively. LNG pricing was also robust for the half, rising to $10.19/Mscf – +36%y/y. The year-on year comparable pricing for crude oil was very favourable this half because of the depressed pricing environment in late 2017, WTI crude bottomed at $43/bbl then.

Total petroleum production was effectively flat year over year at 63 MMBoe. Crude oil production declined by -5% due to natural field declines and a planned maintenance. BHP, much like the rest of the oil & gas industry, continues to be challenged finding new barrels to replace aging fields.

Petroleum exploration expenditure was $316m for the half. The full-year capex is anticipated to be $750m.

Copper

Realized copper pricing in the first half was weak at $2.54/lb, down -18% year over year.  Lower pricing was impacted by reduced industrial production in China and trade tensions.

Total copper production decreased by -1% to 825 kt. Record production at Cerro Colorado was offset by lower volumes at Escondida as a result of lower mined copper grades.

Iron Ore

Iron ore pricing was effectively flat for the half at $55.62/wmt, down -2% year over year.  However iron ore prices have rallied significantly globally since the end of November as global supply has been challenged, Brazilian miner Value has been hit with another deadly disaster at one of its main mines.

Production was up +2% to 119Mt, the increase in production can primarily be attributed to record production at Jimblebar and production recovery at Mt Whaleback from a fire the previous year.

Coal

Metallurgical (coking) coal prices were solid in the half at $179/t, up 9% year over year. Lower competitive forces in the mining industry have enabled the large incumbents to push through higher pricing and exports to China.

Thermal coal prices conversely fell by 4% over the same period to $84.15/t, a function of more developing nations continuing to reduce the negative environmental impacts of coal-fired power generation.

Metallurgical coal production increased by 2% in the half, while thermal coal production was down -5%. The reduced production of thermal coal was a result of a higher strip mining ratio.