BHP Group Riding China’s Steel Wave

Australia | Jan 22 2020

As BHP Group rides China's steel production wave, brokers anticipate the first half result in February will provide an opportunity for the new CEO to outline priorities and opportunities.

-Petroleum now at the lower end of guidance range
-Copper prospects excite several brokers
-Earnings upgrade momentum driven by buoyant iron ore


By Eva Brocklehurst

A strong outlook for iron ore and metallurgical coal is providing momentum for BHP Group ((BHP)). Brokers eagerly anticipate the first half result on February 18, which will be the first opportunity for CEO Mike Henry to publicly address the market and provide answers on how opportunities and priorities are being viewed by the company.

Copper production in the December quarter was the main positive surprise compared with broker forecasts, having benefited from record concentrator throughput across the first half that more than offset the impact related to stoppages in Chile.

Copper and energy (thermal) coal production increased 6% and 8% respectively quarter on quarter, while metallurgical (coking) coal rose 17% after major maintenance was completed in the prior quarter.

Nickel production was down -24% but that was because of maintenance at the Kwinana refinery and Kalgoorlie smelter although this is expected to lift production going forward.

Production guidance is unchanged, although petroleum is expected to come in the lower end of the prior forecast range of 110-116 mmboe. This stems from unfavourable weather conditions in the Gulf of Mexico.

There is also some risk to thermal coal guidance in the instance of any bushfire events near the NSW production hub but at this time guidance is unchanged. Smoke and dust have reduced air quality and this did affect volumes in the second quarter.

Cost guidance was unchanged for FY20. Escondida (copper) is running below cost guidance because of higher by-product credits, which UBS suspects relate to gold. An abnormal charge of -US$500m relating to the cancellation of power contracts at Escondida is included in first half estimates. Brokers point out Rio Tinto ((RIO)), which has called out -$200m for its share, will take the charge against underlying operating earnings.

Meanwhile, funds of US$581m have been released to support the Renova foundation in 2020 which will be offset against Samarco provisioning following the dam failure.

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