BHP Group (BHP) Rides on High Iron Prices Amid High Costs

On May 13, 2021, we issued an updated research report on BHP Group BHP. The company is well-poised to gain on the recent surge in iron ore and copper prices. Its efforts to make operations more efficient through smart technology adoption across the entire value chain will continue to aid in reducing costs, thereby boosting margins. Focus on lowering debt will also fuel growth.

On Track to Meet Fiscal 2021 Iron Ore Guidance

In the nine months ended Mar 31, 2020, BHP’s total iron ore production improved 4% to 188 Mt compared with the prior-year comparable period. Western Australia Iron Ore production was up 3% to a nine-month record 187 Mt (211 Mt on a 100% basis), owing to record production at Jimblebar and strong performance across the supply chain. Notably, this record performance was achieved despite significant weather impacts, and the planned Mining Area C and South Flank major tie-in activity. BHP Group anticipates producing between 245 Mt and 255 Mt of iron ore.  However, the mid-point of the guidance indicates a meager rise of 1% from prior-year levels.

In the first nine months of fiscal 2021, BHP produced 1,232.7 kt of copper, reflecting a year-over-year decline of 6%. Copper production guidance has been raised to a range of 1,535 kt to 1,660 kt, from its prior expectation of 1,510 kt to 1,645 kt. Despite the hike, the mid-point of the guidance reflects a decline of 7% from production in fiscal 2020.

Costs to Increase Y/Y in Fiscal 2021

Conventional Petroleum unit cost is projected at $11-$12 per barrels of oil equivalent (boe). This indicates an 18% increase at the mid-point from prior fiscal levels. Escondida unit cost is estimated to be 95 cents to $1.10 per pound, down from the prior range of $1.00 to $1.25 per pound, reflecting strong production and lower deferred stripping costs. The guidance indicates an increase of 1% at the mid-point from fiscal 2020. The Queensland Coal unit cost for the fiscal is expected at $74-$78 per ton, higher than the prior expectation of $69-$75 per ton due to lower expected volumes for the full year. The mid-point of the new guidance indicated 12% higher costs. WAIO unit cost guidance is projected at $13-$14 per ton, indicating growth of  7% at the mid-point.

Rally in Iron and Copper Prices a Boon

BHP is poised well to gain from the surge in iron ore and copper prices. Iron ore prices have surged past $220 per ton for the first time on record as robust demand in China continues to outstrip supply. Top iron ore producers Rio Tinto plc RIO, BHP and Vale S.A VALE have been struggling to keep up with strong Chinese demand in the first quarter due to operational challenges and weather disruptions. BHP Group’s iron ore production in the January-March period was down 3%, while VALE’s production was down 19.5%. Rio Tinto’s iron ore output in the March quarter fell 2% on an annual basis. Fortescue Metals Group Limited's FSUGY iron ore shipments of 42.3 mt were in line with record shipments last year.

Early this month, copper prices jumped to a record $4.9 per pound. Continued expansion in manufacturing and President Biden’s focus on pushing up infrastructure spending in the United States is working in favor of the metal.

Growth Drivers in Place

BHP Group is making operations more efficient on the back of smart technology adoption across the entire value chain. This has led to 30% minimization in overhead costs and 35% reduction in workforce. The company has been generating net operating cash flow of above $15 billion for four consecutive years. Backed by strong free cash flow generation during the first half of fiscal 2021, the company lowered its net debt to $11.8 billion as of Dec 31, 2020 — below its targeted range of $12 billion to $17 billion. Backed by robust cash flow, strong liquidity position and low cost operations, BHP Group is positioned well to navigate through these troubled times.

As of Mar 31, 2021, the company had four major projects under development in petroleum, iron ore and potash. These projects have a combined budget of $8.5 billion over the life of the projects.

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