BHP sweats on coronavirus containment
The coronavirus crisis needs to be contained within the next six weeks to limit the damage to exports, BHP’s boss says.
The coronavirus crisis needs to be contained within the next six weeks to limit the damage to Australia’s key export commodities, new BHP boss Mike Henry declared on Tuesday.
Delivering his first set of interim results since being named as BHP chief executive in November, Mr Henry said the impact of the virus on BHP sales had been “muted”, despite adding to volatility on commodity markets.
But this may change if the medical crisis persisted beyond the end of March.
“Notwithstanding the tragic impact of coronavirus on people, in terms of our market things have actually held up quite well,” Mr Henry said. “We’re moving all of our product, and demand remains pretty resilient. Prices have held up in part because of some other supply-side disruptions, and we’ve had no issues with payments.
“If the epidemic is contained by the end of this quarter then we expect the economic impact to be muted, with some catch-up on lost demand for most of our commodities by the financial year end.”
His comments came as Mr Henry delivered a strong half-year result, albeit one generated under the leadership of his predecessor, Andrew Mackenzie.
BHP’s net profit rose 29 per cent to $US4.87bn ($7.29bn) compared to the first half of the previous financial year, with operating profit up 13 per cent to $US8.3bn and underlying earnings before interest, tax, depreciation and amortisation up 15 per cent to $US12.1bn.
BHP declared US65c-a-share interim dividend — a record interim payout and the second highest ordinary dividend in its history, but still short of analyst consensus estimates of US71c.
Higher prices and the falling dollar boosted BHP’s flagship iron ore division, with its Pilbara mines delivering earnings before interest and tax of $US6.3bn for the half year, on revenue of $US10.4bn.
The bulk of BHP’s improved profits came from higher iron ore and copper prices through the half year, with the pair combining to deliver an additional $US1.5bn to BHP’s underlying EBITDA in the period. Cost-cutting measures delivered another $US142m.
BHP shares closed up 31c at $38.78 on Tuesday.
Brokerage Citi noted that production and costs guidance remained unchanged under Mr Henry, while merger and acquisitions were not a priority for him.
Mr Henry — previously BHP’s Australian mining boss — flagged no major changes to BHP’s core business, despite speculation he could review the company’s commitment to maintaining its hold on ageing Australian oil and gas assets, and reconsider BHP’s involvement in the giant Jansen potash development in Canada.
But the new chief said the company still believed its petroleum division would deliver strong returns into the future, and confirmed he still expected to put a development proposal for Jansen to BHP’s board in a year’s time.
“We like petroleum, or conventional oil in the jurisdictions that we’re in, and we like gas if it is close to infrastructure,” he told analysts.
Mr Henry said he wanted to “personally get across and comfortable” with the business case for the $US5.5bn potash project, but if it made good sense he would put a case for building the project to the BHP board.
“It has to compete well under the capital allocation framework, so there’s no free passes here,” he said. “Secondly, I do want to personally get across and comfortable with the assumptions that underpin the investment case. Subject to those two things, then we would look to take it forward to the board by next February.”
Mr Henry reiterated BHP’s desire to increase its copper exposure, but ruled out paying big dollars for operating assets, saying BHP would only dip into the market for early-stage or development projects, or preferably find new copper deposits.
“Having seen the pain of acquisitions at the wrong point of the cycle, or for assets that were already mature, I don’t want us to be there,” he said. “So if we were ever going to look at acquisitions it would have to be very good assets, with upside optionality at the bottom or the right side of the cycle.”
BHP’s commodity outlook, posted separately to the company’s blog by BHP market analysis and economics vice-president Huw McKay, said the company expected iron ore prices — still hovering around $US90 a tonne — to soften through the rest of 2020, with metallurgical coal prices likely to lift compared to the second half of 2019.
“Product differentials in both commodities are expected to remain favourable for higher-quality producers, albeit narrower than the extremes of recent history, as steel industry profitability normalises,” Dr McKay said.
He said oil and copper prices were likely to remain volatile, with the signing of the first phase of a trade deal between the US and China a positive step, but with risks around the spread of the coronavirus remaining. But the fundamentals for both were strong.
BHP shares closed up 31c to $38.78 on Tuesday.
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