Half-year results expected to show BHP earnings hit by a steep fall in iron ore prices

BHP’s copper-focused growth strategy is expected to offset the big hit to earnings it will take from soft iron ore prices, when the company releases its half-year results.

BHP MINE in WA. Western Australia Iron Ore Jimblebar, WA Picture – BHP

BHP’s copper-focused growth strategy is back in the spotlight after a half-year update that has raised concerns about falling iron ore prices and debt.

The mining giant shipped record tonnes of iron ore from WA in the six months to December 31, but the price it fetched for the steelmaking ingredient plunged 22 per cent year on year.

The price fall, from $US103.70 a tonne to $US81.11 a tonne as the Chinese property market faltered, means BHP will report a big drop in iron ore earnings partly offset by the rise copper when it releases half-year results next month.

The iron ore price blow is on top of the continued financial bleeding caused by the demise of the Australian nickel industry.

BHP flagged a first-half loss of $US300m ($481m) on nickel as its operations in WA were put into mothballs.

On top of the loss, BHP expects $US300m to $US350m in costs associated with the nickel shutdown which came on the back of price falls sheeted back to Chinese-backed producers in Indonesia flooding the global market.

In copper, volumes were up 10 per cent as prices firmed year on year and the Escondida mine in Chile achieved a 10-year production record.

The performance of Escondida made up for a two-week outage at Olympic Dam after wild electrical storms hit South Australia in October. BHP has flagged a $US150m earnings hit from the outage.

BHP reported a 14 per cent increase in production at the Queensland-based BMA coal operations, allowing for the $US3.2bn sale of the Daunia and Blackwater mines to Whitehaven Coal.

However, the price for BMA’s metallurgical coal fell 23 per cent year on year to $US206.37 a tonne.

BHP chief executive Mike Henry said the world’s biggest mining company would carry strong momentum into the second half, based on the performance of iron ore, copper and steelmaking coal assets.

“BHP is in good shape and we have a clear pathway for growth,” he said, despite not making any reference to last year’s abandoned $US49bn bid for Anglo American.

Analysts say reports of merger talks between Rio Tinto and Glencore could breathe new life into the copper-focused Anglo deal or at least stir other M&A activity at the top of the mining tree in 2025.

It is understood the talks between Rio and Glencore were brief and have ended, but neither company has made a public comment.

BHP chief executive Mike Henry. Picture: Luke Marsden

BHP said it expected net debt to sit between $US11.5bn and $US12.5bn following the execution of a final settlement with Brazilian authorities over the 2015 Samarco dam collapse which killed 19 people and caused widespread damage.

The company said the net debt balance would increase to somewhere under $US15bn by June 30 as it finalised a deal with Lundin Mining for a stake in a prized Chilean copper project and made more payments under the Samarco settlement.

BHP made $US637m in payments related to Samarco in the first half while noting an increase in iron ore pellet production at the Brazilian operations owned in partnership with Vale.

Analysts at Barclays sounded the alarm on debt on the back of weaker commodity prices, higher costs and one-off cashflow setbacks.

Barclays said net debt guidance for the first half was 19 per cent higher than consensus forecasts and 40 per cent above consensus for the full year.

The investment bank has already flagged that BHP may need to become even more reliant on iron ore for free cashflow to pay for growth ambitions in copper and potash.

The funding dilemma has added complexity to BHP’s call on whether or not to expand WA iron ore production to 330 million tonnes a year, as most big players in the industry believe Chinese demand has peaked.

BHP produced 131 million tonnes of iron ore in WA in the first half and was able to ship record tonnage after competing major upgrades to infrastructure at Port Hedland, including work on car dumpers that empty train carriages full of iron ore and shiploaders.

The next phase of the removing the bottleneck to the supply chain involves work on the rail system during which locomotives taken off track for major upgrades.

Originally published as Half-year results expected to show BHP earnings hit by a steep fall in iron ore prices