- On the commodity mix, BHP delivered a mixed quarter.
- According to the latest rumors, there might be a £5 billion charge on the Mariana dam failure.
- A solid FCF generation and a tasty DPS might seem attractive to some investors. After the results, we reaffirm our neutral rating.
After our comment on Rio Tinto's second-quarter operational performance, today BHP Group ( BHP ) released its three-month production numbers . We started BHP's coverage with a neutral rating based on commodity mix forecast and ESG disinvestments at the cost of losing valuable assets . After a 30% decline in the stock price, today we reaffirm our neutral rating on the Australian mining corporation, but we also highlight the company's ability on FCF generation and the tasty dividend per share. BHP's next catalyst is the full report and Q&A session (here is the link) that the company will disclose on the 16th of August. Ahead of the results, today we deep-dive into the Q4 operational review release.
Q4 Production Results
Looking at the Wall Street's expectations, BHP delivered a mixed quarter, iron ore and copper production was in line with consensus estimates, whereas the company missed expectations on met coal deliveries.
Regarding the specific commodity results, here below is Mare Evidence Lab's key takeaway:
- Iron ore (WAIO) production result was at the top end of 2022 guidance. For the quarter, iron ore commodity price stood at $113 per ton and 2023 outlook was also reiterated.
- Copper was a positive surprise with a 2.5% production above consensus thanks to a good delivery from the Escondida mining facility. Realized price was below the analyst's expectation due to the provisional pricing effect (Rio Tinto was also impacted by the same effect). Despite the lower forecast on the Pampa Norte production site due to the Cerro Colorado closure, BHP confirmed its copper guidance for 2023.
- As already explained, Met coal production missed analyst consensus by more than 15%. This was due to COVID-19 absenteeism and adverse weather conditions. Despite that, coal's realized price stood at $26 per ton (much higher than consensus estimates). Thus, the coal outlook was left unchanged.
On the back of the commodities output, other important news needs to be reported. With the new coal royalty regime (already in place from the 1st of July), royalties will increase to 19% from 7%. This will impact future investment and commodities output. A minor positive is expected by the Woodside transaction , BHP currently expects to receive a slightly higher net cash contribution ($1.1 billion versus $1 billion disclosed a few months ago). On the other hand, Samarco's impact is still a question mark. According to the latest news , the UK Court has confirmed to allow a class action versus the Australian mining company following the Mariana dam failure that happened in Brazil in 2015. The latest rumors estimated a £5 billion financial impact, but BHP has still not disclosed any numbers. As already mentioned, Cerro Colorado will potentially book a write-off of $400/500 million due to the site closure with a few WC adjustments to be made.
Conclusion and Valuation
Adjusting our internal estimates on BHP's latest numbers, we decide to lower our target price to $40 per share, maintaining a hold rating. This valuation is based on the average between a net present value model and a 2023 EV/EBITDA of 4x (in line with peers' valuation). BHP has a solid balance sheet, but we are still cautious of their divestment that came at the wrong time for their fossil fuel assets. At this stage, we see a lack of long-term growth opportunities, and we highlight potential M&A risks. BHP is still trading at a higher valuation compared to Rio Tinto (RIO) and Glencore (GLNCY), both rated with a buy.
For further details see:
BHP Group: Q4 Production Report Analysis