Strength From Diversity Underpins BHP Group

Australia | Oct 21 2020

A softer performance is likely over the December quarter for BHP Group but brokers remain confident the company can meet FY21 guidance, underpinned by key commodities.

-Activity in Dec quarter likely affected by maintenance, weather
-Robust fundamentals underpin the stock
-Olympic Dam expansion shelved

By Eva Brocklehurst

BHP Group ((BHP)) beat broker estimates on copper, iron ore and petroleum in the first quarter but has flagged a subsequently softer performance in all three. Coal, on the other hand, lagged expectations.

Brokers believe the company can meet FY21 guidance, which is unchanged. Expenditure on Jansen (Canada) potash has increased to US$3bn and an investment decision is slated for mid 2021.

Shaw and Partners believes the scorecard in the September quarter has provided enough cover for what could be some shortfallin the December quarter stemming from maintenance and weather.

Earnings upgrade momentum remains strong, in Macquarie's view, as the stock is trading on 13% free cash flow yields at spot prices, while Goldman Sachs has a positive view on growth options across oil, copper and metallurgical (coking) coal.

The broker also believes BHP will "win in the Pilbara" in terms of capital expenditure, margin and free cash flow compared with rivals Rio Tinto ((RIO)) and Fortescue Metals ((FMG)),after the ramp up of South Flank (Western Australia).

Ord Minnett also retains a slight preference for BHP based on a steady operating performance and attractive valuation, while Morgans highlights a strong combination of robust fundamentals (earnings, yield & gearing) and solid top-down market exposures (currently iron ore, copper and a recovery in coal, energy).

Softness Ahead?

The company has indicated the iron ore volumes in the December quarter will be affected by activities tying in South Flank with the Mining Area C rail spur as well as maintenance at the port. FY21 guidance for shipments is unchanged 276-286mt.

Credit Suisse notes sentiment around iron ore has eased in the past month as port inventory hasslowly risen,while steel margins remain low and finished steel inventory elevated. Iron ore continues to perform well forthe company but pricing is likely to drive sentiment over the short term, the broker adds, retaining a slight preference over Rio Tinto because of greater commodity diversity.

Petroleum volumes in the Gulf of Mexico could be softer as the company has flagged potential for a more intense hurricane season, while tie-ins for the Ruby project will affect Trinidad and Tobago.The additional acquisition of a 28% interest in Shenzi, taking BHP's stake to 72%, is expected to be finalised by the end of the year.

FY21 guidance unchanged 95-102mmboe which does not reflect the acquisition. Goldman Sachs expects Trinidad and Tobago willprovide a large share of future petroleum growth for the company.

Copper weakness will stem from fewer workers at Escondida(Chile)whichis likely to continue at current levels for the December quarter,with production expected in a range of 1.48-1.65mt.

Metallurgical coal guidance for FY21 is 40-44mt and the company has previously announced it will look at exiting metallurgical assets at the BMC joint venture as well as its NSW and Cerrejon(Colombia) thermal assets.

Macquarie believes the exitprocess could take up to two years with de-mergera possibility. The first quarter was affected by plant shutdowns at Queensland coal wash plants and ongoing industrial action at Cerrejon means coal volumes are under review. BHPis also monitoring the potential impact of China's import restrictions on coal.

Olympic Dam

The expansion of Olympic Dam (South Australia) has been shelved, with BHP citing complexity in the orebody, where grades are highly variable, and higher capital constraints.

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