BHP says cost inflation, lower prices, hit half-year profit result
The mining giant has put two Queensland coking coal mines on the block, saying they will struggle to compete going forward.
BHP chief executive Mike Henry says the company will be finished winnowing down its coking coal portfolio after the sale of two more mines, despite still being at odds with the Queensland government over an increase in royalty rates.
BHP confirmed on Tuesday it plans to put its Daunia and Blackwater mines – part of its BMA group in Queensland – on the block, saying both would struggle to compete for capital going forward.
The mining giant closed the sale of its lower-grade BMC coking coal assets to Stanmore Resources in 2022, and Mr Henry said the sale of Daunia and Blackwater was also targeted at shedding more of BHP’s lesser coking coal assets, leaving the company with only its six best export-quality metallurgical coal mines, held in the BMA joint venture with Mitsubishi.
But a shadow still lingers over the long-term future of those mines, despite Mr Henry confirming on Tuesday the company was committed to retaining high-quality coking coal in its portfolio.
“A key route for steelmakers to be able to reduce their carbon intensity will be through more efficient blast furnace operations. That requires the highest quality coking coals,” he said.
Amid a review of the future of its Queensland coal mines in response to windfall royalty rates introduced as part of the state’s budget, BHP set aside $750m in its August 2022 annual financial accounts for the possible early closure and rehabilitation costs, as the company put further investment in the state on hold.
Mr Henry said the decision to sell Daunia and Blackwater was not related to the Queensland royalty rate rises, but confirmed a review of the life of its other operations in the state was ongoing.
BHP’s accounts show the company paid $US799m in royalties from its BMA mines in the first half of the financial year, on revenue of $US3.6bn for the half. That royalty payment was almost double the amount paid in the first half of the previous financial year, when BMA booked revenue of $US3.39bn.
Mr Henry would not comment on when that review was expected to be completed, but told The Australian the company’s accounts showed the impact of the Queensland royalty rate increases.
“We‘re not playing at the margins here. Essentially, what they’ve done is shaved off the peaks from quite a cyclic industry,” he said.
“We‘re going to recoup much less than the good years now. And so you get left with the downside, which is an even tougher downside because of inflation and you lose the upside. So this is a pretty fundamental re-look at how we operate those mines going into the future.”
BHP said costs at its global operations faced an effective inflation rate of 12 per cent for the first half of the year, with production costs at almost all of its operations coming in above the company’s revised guidance levels.
But the company beat analyst expectations for its interim dividend, with the company to pay a US90c a share interim dividend after booking a half-year net profit of $US6.46bn, 24 per cent beneath previous year on the back of lower iron ore prices and rising costs.
BHP said it booked an underlying net profit of $US6.6bn, on the back of $US25.71bn in revenue, and underlying earnings before interest, tax, depreciation and amortisation of $US13.2bn.
Consensus analyst estimates had tipped BHP’s underlying net profit at $US6.82bn, with underlying EBITDA around $US13.92bn, with Barrenjoey analyst Glynn Lawcock telling clients in a recent note he expected underlying net profit of $US7.04bn.
BHP had been expected to pay a US88c a share interim dividend, according to a consensus estimate published on Vuma, with Barrenjoey expecting US80c.
Mr Lawcock said he had expected BHP to be more conservative with its interim dividend, and said the accounts showed the company had faced considerable cost headwinds in the half.
“Clearly the result was a little bit under expectations driven by some one-off costs and may not repeat in the second half, driven primarily by inventory movement and freight recovery, once we take away these items the result was fairly in line with expectations,” he said.
“The market is obviously disappointed with the miss on earnings as evidenced by the share price reaction today, but we know there was approximately $US900m of cost headwinds that were not appreciated prior to the release.”
BHP chief executive Mike Henry said the company was “positive” about the demand outlook for the second half of the year, with China’s economy strengthening.
“We expect domestic demand in China and India to provide stabilising counterweights to the ongoing slowdown in global trade and in the economies of the US, Japan and Europe,” he said.
But rising costs had a significant impact across BHP’s major operating divisions. Unit costs at its WA iron ore operations lifted 13 per cent to $US18.30 a tonne compared to the same period the previous financial year, with BHP blaming higher diesel prices for the sharp lift.
Based on BHP’s previous 72c exchange rate expectations, costs were $US19.28 a tonne.
BHP said it still expected full-year unit costs to come in between $US18 and $US19 a tonne.
The shifting exchange rate also pushed up costs at BHP’s BMA coal operations in Queensland, which booked average costs of $US108.32 a tonne for the half – also above its revised guidance of $US100 to $US105 a tonne range.
And costs at its Mt Arthur thermal coal mine in NSW also surged, up 49 per cent to $US108.85 compared to the first half of the previous financial year.
BHP said it had net operating cash flows of $US6.8bn for the half, reflecting lower iron ore and copper prices, with its operations generating $US3.5bn in free cash flow.
The company received an average $US85.46 a wet metric tonne for its iron ore in the period, down 25 per cent compared to the first half of last financial year. Hard coking coal pricing was down 3 per cent to $US$US270.65 a tonne – but lower grade coking coal was up 15 per centto $US252.12, with copper down 19 per cent to $US3.49 a pound.
BHP’s thermal coal prices were up 157 per cent to an average $US354.30 a tonne.
BHP’s iron ore division booked underlying EBITDA of $US7.62bn, with its coking coal operations returning an underlying EBITDA of $US1.43bn – just above that of its NSW thermal coal profits of $US1.23bn.
BHP shares closed down 16c to $48.30.