Summary
- BHP's output was softer than expected due to adverse weather conditions rather than operational challenges.
- We positively favor the latest company update on the supply chain at BHP's main facilities.
- Guidance was left unchanged and so did our valuation.
After our analysis of Rio Tinto's (RIO) third-quarter production report, today BHP Group ( BHP ; BHPLF ) just published its Q1 operational performance . Here at the Lab, we started BHP's coverage with a neutral rating , preferring overtime Rio Tinto's compelling valuation . Indeed, the companies shared the same commodity mix exposure and are both currently targeting add-ons to diversify their EBITDA mix. Recently, we also released a follow-up note on BHP's M&A optionality, in which we highlight the OZ Minerals proposal and analyzed the latest rejection. No new indications were mentioned during the Q1 production report, whereas Rio Tinto was pretty optimistic about THR's proposal that was unanimously " supported by the Turquoise Hill Board, who have recommended shareholders vote in favor of the transaction ".
Q1 Production Results
As for Rio Tinto, BHP's production was also softer than expected. Looking at the aggregate level, the iron ore number was in line with expectations, whereas coals and copper output were below the analyst consensus average. Despite that, we should note that the main reason behind these weaknesses was driven by external factors such as higher maintenance and adverse weather conditions rather than fundamental operational challenges.
BHP Q1 Operational Performance
Regarding the specific commodity output, presented below is our first impression:
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Copper production was rather mixed across BHP's mines. Antamina achieved strong growth while Escondida delivered a 13% reduction on a quarterly basis. The new operation in Pampa Norte increased output by 5%; however, there are ongoing improvements that in the short-term horizon are lowering the copper output but will be able to increase additional capacity over time (expected in 2023);
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Iron ore production (at WAIO) delivered a one percent increase on a quarterly basis and was above consensus expectations. Last year, the major offset was related to COVID-19 shortages and absenteeism, this year WAIO output was partially offset by heavy rain. Important to highlight is the new development on logistics which will be performed at South Flank that continues to ramp up and will deliver additional cost-savings. There is a full presentation recently released by BHP .
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Met coal production was the most important miss. Adverse weather conditions at a ten-year record and labor shortages were the key negative catalysts. If we include maintenance at Saraji, Blackwater, and Goonyella mines, this weighed down on met coal production. The same negative development was achieved in energy coal production, recording a minus 34% on a quarterly basis.
- Concerning Nickel output, production was 2% lower than the Wall Street consensus estimated. However, the output result was sequentially better thanks to lower maintenance.
Conclusion and Valuation
Key to note is that BHP commodity guidance was left unchanged across the whole commodity platform. For this reason, we are maintaining our valuation with a target price of A$40 per share based on the average between an NPV model and a 2023 EV/EBITDA of 4x (in line with comps). The company is still trading at a premium valuation compared to Rio Tinto, and it is important to emphasize the potential M&A risks.
BHP Guidance (BHP Q1 Operational Performance)
For further details see:
BHP Group: Q1 Production Report Analysis