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Iron ore strong for BHP as Olympic Dam disappoints again

BHP has walked back its guidance of a slight increase in group volume this financial year after a mixed quarter.
Iron ore strong for BHP as Olympic Dam disappoints again Iron ore strong for BHP as Olympic Dam disappoints again Iron ore strong for BHP as Olympic Dam disappoints again Iron ore strong for BHP as Olympic Dam disappoints again Iron ore strong for BHP as Olympic Dam disappoints again

Iron ore was the only division to have its guidance maintained after a record nine-month performance of 181 million attributable tonnes produced, up 3%.

March quarter production of 60Mt was slightly down on the December quarter due to the impacts of cyclones, which was offset by increased car dumper availability and reliability.

Full-year guidance was maintained at 242-253Mt attributable, or 273-286Mt on a 100% basis.

While guidance for petroleum and metallurgical coal were maintained, both were expected to come in at the lower end of the respective ranges after weak March quarters due to weather.

Copper production of 425,000t was down 7% quarter-on-quarter due to lower copper grades at Escondida in Chile and unplanned downtime at the Olympic Dam smelter in South Australia.

Production for the nine months to March 31 was up 5% to 1.31Mt, but full-year guidance of 1.7-1.82Mt is under review due to the suspension at Antamina in Peru due to a coronavirus-related lockdown.

Olympic Dam guidance was lowered from 180,000-205,000t to about 170,000t.

BHP said the physical replacement of the refinery crane and commissioning, planned to begin in the March quarter, has been impacted by COVID-19 restrictions, and completion is now expected by the end of the 2020 calendar year.

Full-year nickel guidance was lowered from 87,000t to 80,000-83,000t due to an extended shutdown due to planned quadrennial maintenance.

Energy coal guidance is under review as Cerrejon in Colombia was put on care and maintenance.

Full-year unit cost guidance remains unchanged.

"All together this is likely to see modest consensus earnings downgrades," RBC Capital Markets analyst Tyler Broda said.

COVID-19

CEO Mike Henry said the "small number of colleagues" from BHP's 72,000-strong global workforce who had tested positive for coronavirus had recovered or are recovering well, and there was no transmission to co-workers.

BHP said while its major projects in iron ore and petroleum were tracking to plan, the schedules for the Spence Growth Option in Chile and Jansen potash project in Canada were under review.

The company warned capital expenditure and exploration guidance of US$8 billion in FY21 was expected to be lower, with details to be provided in August.

RBC is forecasting FY21 capex of $6.5 billion.

BHP reiterated the strength of its balance sheet, with December 31 cash and equivalents of $14.3 billion and net debt at $12.8 billion, at the lower end of its target range.

"The coupling of our disciplined controls, the commitment of people across BHP, and our financial strength has enabled us to continue to safely operate and supply our customers with the critical resources they require, and to continue to provide jobs and an underpinning of economic activity both locally and around the world," Henry said.

"BHP is committed to playing its part in the collective, global response to this pandemic. Our business continuity plans have been effective and our operations have continued to perform well, thanks to the effort of our employees, contractors and suppliers."

Outlook

BHP said the developed world may have tentatively passed the peak of new COVID-19 cases for "wave one infections", but developing countries were still in the escalation phase.

"While demand in China has strengthened in recent weeks, we expect other major economies, including the US, Europe and India, to contract sharply in the June 2020 quarter," Henry said.

"The situation remains fluid, however, with our strong financial position and low-cost operations, our business is resilient, with capacity to generate solid cashflow through this period and emerge well placed as the global economy recovers."

BHP said countries that had enacted "hibernation policies" were expected to have a smoother resumption of activity.

It said while Chinese domestic industrial activity had been improving, it was cautious of a second wave of infections.

BHP expects steel production outside China to contract by a double-digit percentage this year

"If China can avoid a second wave of COVID-19, steel production may rise slightly in the 2020 calendar year," it said.

The company noted the resilience of the iron ore spot price, but said the geographic diversification of metallurgical coal demand was an impediment under "today's unique circumstances".

BHP believes the drop in copper demand outside China will be less severe than steel, but Chinese copper demand could also be "marginally weaker than steel" in 2020.

In oil, where WTI futures fell to negative $37 a barrel overnight, BHP said global storage capacity would be tested in the coming weeks and months.

BHP shares fell 1.4% to A$30.39 after trading at over $41 in January.

"We continue to advocate a cautious approach to the sector but BHP's mix of diversified, high margin exposures, at reasonable long-term valuation of 0.8x NAV, 5.4x spot 2021E EV/EBITDA and screening with the lowest downside in our COVID-19 scenarios should drive outperformance on a 12-month view," Broda said.