BHP’s spectacular profit and even more spectacular – and unexpected – dividend was all about iron ore and iron ore was all about China.
And it’s only got better – at least in the six weeks since BHP ruled off these numbers for the first half at the end of December.
That poses a deliciously acute – or should that be, acutely delicious? – poser for BHP; as right now you would not really want to have all your – profit fragile? - eggs in the ‘China basket’. Or for that matter, medium-to-long term either.
Iron ore contributed 55 per cent of group revenue and 70 per cent of group gross profit (EBITDA).
Even more spectacularly mouth-watering was that iron ore posted a staggering gross profit margin of 73c in the revenue dollar.
Revenue was $US14.06bn ($18.3bn) and EBITDA was $US10.2bn $(13.2bn).
Why, that’s better, way better, than the 60c in the revenue dollar that the monopoly NBN is heading for in a few years’ time, as I detailed last week – or indeed the similar sorts of super-profits that Telstra earned in its monopoly hay day.
All the rest of BHP added to an EBITDA of $US4.4bn on revenue of $US11.6bn. That was a gross margin of 38c in the revenue dollar.
This other part of BHP was all about copper, riding a strong surge in the copper price as the world economy came back from its virus lockdowns and ran smack into long-term copper supply shortages.
AS BHP CEO Mike Henry projected, China will this year produce more than one billion tonnes of steel for the third successive year. That’s a little over half of the entire world output.
So demand for iron ore (and met coal) will stay strong; and ‘TINA’ – There Is No Alternative – delivers the loot to BHP and its two fellow Pilbara miners, Rio Tinto and Fortescue, as the only realistic option for supply; for quality supply; for reliable supply.
And delivers the loot also, not exactly incidentally, on to the taxpayer - of Australia with company tax, of WA with royalties.
AS BHP noted, it paid out 34c in every dollar of bottom line profit in normal tax and 42c of every dollar when you added royalties.
What used to be not just the world’s biggest producer of iron ore but also the dominant player
controlling the market, Brazil’s Vale, is bogged in its long-term environmental neglect and rolling roiling disasters.
At best - and I stress, at a most unlikely best – Brazil might start to boost supply by the mid-2020s; while the other potential player, Guinea in Africa, is more like 2030 at the earliest.
This reality is playing out in the continued rise and rise of the iron ore price.
BHP averaged $US101 a tonne over the six months. In all of the six weeks since, it’s been well above that and for much of the time in the $US150-170 range.
The way a rising iron ore price delivers all-but pure profit to BHP – and Rio and Fortescue – is captured by the change in the revenue and profit figures half-to-half.
Iron ore revenue was up $US3.7bn, the division’s gross profit was up $US3.1bn – a staggering 84c of every extra revenue dollar stuck to the gross bottom line.
The same of course applies in the opposite direction with falling prices and falling revenue, and profit. If China suddenly took a big and I mean mammoth ‘time out’, well………
Clearly, BHP thinks that unlikely. The $US1.01 ($1.31) dividend will take almost all (85 per cent) of the underlying bottom-line profit.
Right now Bass Strait remains the biggest BHP oil-field. But it’s running down fast at an accelerating pace – providing a pretty sombre, bookend to the refinery closures.
In short, soon we won’t have any local oil to put through refineries that don’t exist anyway: Australia’s de-industrialised 21st century, batteries not included.
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