BHP talks up Chile copper, but output forecasts disappoint
BHP Billiton dampened production expectations for 2017-18, but analysts say a dividend surprise is still possible.
BHP Billiton is ramping up the Escondida copper mine in Chile at a rapid rate this year, but a surprise overhaul scheduled for Olympic Dam and a pullback on production from its maligned US shale assets have dampened market production expectations for 2017-18.
Still, the big miner is light on capital spending plans and analysts are saying that, combined with strength in iron ore and copper prices, dividend surprises could be on the way.
BHP yesterday issued a fourth-quarter report that met expectations for full-year production but remained firm in guidance for this year.
It also revealed a long strike earlier this calendar year at the giant Escondida copper mine it owns with Rio Tinto in Chile cost it $US546 million ($688m) in lost production, in an item it will exclude from its underlying full-year profit.
BHP chief Andrew Mackenzie highlighted a big boost in production coming from Escondida, the world’s biggest copper mine, following the low-cost Los Colorodas expansion and another expected record from the company’s West Australian iron ore mines.
“Our people have stepped up to unlock low-cost latent capacity and achieve strong productivity gains across our tier-one assets,” Mr Mackenzie said.
But analysts were underwhelmed. Citi’s Clarke Wilkins cut BHP’s rating to neutral and its target price from $26.60 to $25.50, because of 2017-18 earnings downgrades on the back of lower production and lower oil price expectations.
“Production guidance (in 2017-18) for copper equivalent growth of 7 per cent was lower than our previous estimates, due to Olympic Dam production of only 150,000 tonnes,” he said.
UBS analyst Glyn Lawcock said BHP’s copper guidance was in line with his expectations but that petroleum guidance was lower.
BHP warned Olympic Dam, where 2016-17 copper production fell 16 per cent to 166,000 tonnes because of power outages, faced another low-production year.
“Copper production of 150,000 tonnes is expected in the 2018 financial year as a major smelter maintenance campaign is phased through August to November 2017,” BHP said.
The maintenance is planned to underpin a boost to 215,000 tonnes in 2018-19 and 280,000 tonnes by 2021-22.
Mr Wilkins noted the mine had averaged 174,000 tonnes per year of production since BHP acquired it in 2005, versus capacity of 235,000 tonnes.
Escondida, in which BHP has a 57 per cent stake, will this financial year produce as much as 1.23 million tonnes of copper, up from 772,000 tonnes in a strike-affected 2016-17, as a third concentrator starts.
For 2016-17, BHP announced full-year production falls in all of its key businesses except West Australian iron ore, which delivered a full-year record of 268 million tonnes (including minority partners’ share), in line with guidance.
Petroleum was hit by pullbacks in US shale, copper fell because of the Chilean strikes and power outages at Olympic Dam, and Queensland coking coal was hit by the impact of Cyclone Debbie. All the numbers were in line with analyst expectations.
BHP said it would record $US746m of after-tax full-year charges when it delivers its profit report next month.
“These items relate to idle capacity and other strike-related costs incurred as a result of the Escondida industrial action in the March 2017 quarter and Chilean withholding tax on a one-off dividend paid while a concessional tax rate was available,” BHP said.
The strikes accounted for $US546m of the charge before tax, or $US367m after tax. The quarterly production update comes as BHP faces criticism from New York hedge fund Elliott over its underperformance and accusations long-serving directors stood by while billions of dollars were misspent on acquisitions and mistimed share buybacks.
BHP’s oil and gas production is expected to fall further in the year until June 2018, despite an increase in US onshore shale activity.
The petroleum division’s production declined by 13 per cent in the latest year to 208 million barrels of oil equivalent, and BHP said it was likely to fall to between 180 and 190 million barrels in fiscal 2018.
A previously announced expanded drilling campaign in US shale, where BHP is looking at doubling its existing rigs from five to 10, is expected to increase production from onshore fields by 35 per cent to as much as 90,000 barrels per day in 2018-19.
Despite the downbeat guidance, iron ore and coking coal prices could lead to dividend boosts, some analysts said. “I think they are a strong chance of a surprise dividend in August,” Morgans analyst Adrian Prendergast said.
“Their capex plans are still light, while there is price strength across some of their markets.”
Citi forecasts $US2.2bn of free cash for capital management in 2018-19 and $US3bn in the following year. It is forecasting 2016-17 full-year underlying profit of $US6.76bn, up from $US1.22 the previous year.
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