Australia | Feb 17 2021
BHP Group is bullish about the outlook for key commodities, confirming its view with a surprise increase in its interim dividend
-Growth in underlying earnings largely driven by rising prices
-Climate change policy in US could mean restricted oil & gas
-Market likely to focus on cash returns
By Eva Brocklehurst
BHP Group ((BHP)) has delivered what everyone likes, a surprise increase to its interim dividend. Nevertheless, underlying net profit missed consensus expectations because of write-downs at Turrum and higher depreciation at Yandi.
Morgans highlights the company was more bullish regarding the outlook for commodities compared to its view at the August results, assessing durable growth was stemming from growing population and improved living standards in key consuming economies.
Growth in underlying earnings was largely driven by rising prices, as copper equivalent production was broadly flat. Iron ore and copper accounted for 70% and 25% of group operating earnings, respectively.
Macquarie lowers earnings estimates after incorporating the results because of increased depreciation expenses in petroleum, iron ore and Queensland coal, while noting these changes are essentially non-cash.
The broker flags US president Joe Biden's signing of orders to tackle climate change which could mean restrictions are placed on oil & gas developments in the US, although this should impact future developments rather than the status quo.
The company has retained a commitment to metallurgical (coking) coal and petroleum, noting the complimentary nature of metallurgical coal with China's steel industry. Morgan Stanley points out, unlike iron ore, the business is diversified across several markets and demand should remain resilient for a high-quality coking coal product.
Credit Suisse compares the latest commentary with August, noting currency is providing a headwind on the cost side while commodity and economic commentary is far more assertive.
The broker remains positive about the iron ore business but prefers Rio Tinto ((RIO)) at current prices as BHP's oil interests remain one of the risks to a relative call. The company has taken note of environmental (ESG) concerns regarding oil & gas but envisages solid fundamentals in the industry. That said, only high-returning investments will be made and mature assets are likely to be divested.
Meanwhile, a process to exit assets at the BMC joint venture in NSW thermal coal as well as the Cerrejon assets will commence, although no timeframe was provided. A final decision will be made based on circumstances at the end of a two-year period.
In copper, BHP is looking at medium-term debottlenecking options at Olympic Dam. Morgan Stanley notes the capital costs of the expansion will be significant and this implies low returns. Consequently, there needs to be a shift in productivity assumptions to improve the economics.
At Escondida, a high prevalence of coronavirus in Chile has hampered the business although the roll-out of vaccines is accelerating. Citi believes with deployment of the vaccine underway a major downside risk has been substantially mitigated. Moreover, the scale of stimulus being applied in several economic zones should mean solid support for a recovery.
Cost guidance is unchanged, although higher unit costs at Queensland coal are anticipated because of low volumes and maintenance. Capital expenditure guidance was lifted to US$7.3bn, given the higher Australian dollar.
BHP paid out 85% of net profit, equal to 100% of free cash flow in the first half. This translated to an interim dividend of US$1.01. Management stated its minimum 50% net profit pay-out policy remains in place but flexibility is retained for higher distributions based on market conditions.