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BHP posts an OK fourth quarter: Flags cautionary outlook

Tue 19 Jul 22, 12:14pm (AEST)
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Key Points

  • BHP advised the market to expect the sale between 278m and 290m tonnes of iron ore this year
  • BHP achieved the majority of its guidance, but nickel production of 76.8kt missed guidance due to an unplanned smelter outage
  • CEO Mike Henry reminded investors that the outlook for the miner’s markets remained weak

After watching the share price fall away by around -21% since early June, due to inflationary pressures, downgrades to commodity forecasts and a downgrade by Goldman Sachs to Neutral, BHP (ASX: BHP) shareholders regained some lost ground this morning (up 2.41%) after the ‘big Australian’ announced a reasonably upbeat fourth quarter result.

Within its June quarter production report released this morning, BHP advised that iron ore production rose 8% quarter on quarter to 64.2m tonnes, bringing its full year production to 253.2m tonnes.

This was flat on the prior corresponding period but in line with its guidance range of 249m tonnes to 259m tonnes.

Strong finish

Much of the strong finish to the year can be attributed to higher volumes at WA iron ore, reflecting record production from the Mining Area C hub and the continued ramp up of South Flank and improved supply chain performance.

BHP advised the market to expect the sale between 278m and 290m tonnes of iron ore this year. While at the midpoint, this matches the export volumes of the past three years, but is below consensus expectations of 292m tonnes.

Overall, BHP achieved the majority of its guidance, but nickel production of 76.8kt missed guidance due to an unplanned smelter outage.

In copper, Escondida in Chile had record material mined and near-record concentrator throughput, while Olympic Dam in South Australia performed strongly in the fourth quarter after planned smelter maintenance.

Cautious outlook

But after a challenging year hampered by covid and weather-related disruptions, production volumes within the company’s mainstay Australian iron ore and coking coal divisions are expected to be soft over the following 12 months.

Despite the strong operating result, BHP boss Mike Henry reminded investors that the outlook for the miner’s markets remained weak.

“Broader market volatility continues, and we expect the lag effect of inflationary pressures to continue through the 2023 financial year, along with labour market tightness and supply chain constraints,” he noted.

Looking forward

But on a slightly more positive note, over the year ahead, Henry expects China to contribute positively to growth as stimulus policies take effect.

However, continuing conflict in Ukraine, the unfolding energy crisis in Europe and policy tightening globally are expected to contribute to an overall slowing of global growth.

The company notes major progress in its plans to open a new potash business, completing the first shafts and the underground mine, and hopes to bring forward the opening date for its US$5.7bn Jansen mine in Canada to 2026.

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BHP share price over 12 months.

 

What brokers think

Consensus on BHP is Moderate Buy.

Based on Morningstar’s fair value of $39.07 the stock appears to be undervalued.

Based on the six brokers that cover BHP (as reported on by FN Arena) the stock is currently trading with 18.1% upside to the target price of $44.33.

Macquarie views BHP’s quarterly market update today as "solid", though realised pricing is labelled as "mixed".

The broker notes the company's FY23 production guidance remains in-line with its own projections, with copper the primary driver for volume growth next year.

Macquarie maintains an Outperform rating, and target price of $50.00 and is forecasting a full year FY22 dividend of 405.42 cents and EPS of 588.07 cents.

RBC considered BHP's fourth quarter production report as weak, noting a strong performance in copper and thermal coal, with the remainder of the portfolio, including key revenue driver iron ore, coming in below expectations.

The bank’s analysts expects downward revisions to consensus heading into the FY22 results.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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