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Eric Johnston

More to come from the BHP cash machine

Eric Johnston
BHP chief executive Mike Henry and CFO David Lamont at the company’s headquarters in Melbourne. Mr Henry warns that the mining giant is seeing ‘stark inflationary pressures globally’. Picture: Thomas Graham
BHP chief executive Mike Henry and CFO David Lamont at the company’s headquarters in Melbourne. Mr Henry warns that the mining giant is seeing ‘stark inflationary pressures globally’. Picture: Thomas Graham

BHP’s transformation into a cash machine is almost complete, with today’s surging copper and coal prices and iron ore fightback set to deliver billions more back to shareholders when it closes its full year books at the end of June.

It took nearly two decades and some costly own goals, but BHP’s homecoming to Australia is as a leaner, focused and mature global miner with a bigger balance sheet than it knows what to do with. So chief executive Mike Henry is sending a record $US7.6bn ($10.66bn) back to mum and dad shareholders through a cold, hard cash dividend and for now his cautious nature means he is firmly resisting the investment banker pitches to spend the pile on blockbuster acquisitions.

To highlight the extent of how much cash is flowing through its accounts at the current run rate BHP could pay down all of its remaining $US6.1bn in debt by April, without missing a beat from paying all the costs linked to running a global miner.

And with the looming split of BHP’s oil and gas business which will be folded into Woodside, shareholders are about to see how costly digging for oil has been.

BHP’s capex and exploration spending has shrunk to a little under $US3bn for each of the past two years and there

This compares to a recent capex peak of $US7.5bn, where much of the spending was going into the Gulf of Mexico. In oil, which is mostly in deep water, you have to spend a lot of money to make money and the booming iron ore returns of recent years has been footing much of the energy expansion. The biggest looming forward cost is the $US5.7bn Jansen potash project but this spend is to be spread over several years.

BHP’s Atlantis South oil and gas project, situated in the Gulf of Mexico.
BHP’s Atlantis South oil and gas project, situated in the Gulf of Mexico.

BHP will still have an exposure to the current boom in oil prices with a 48 per cent stake in Woodside, but won’t have the massive capital costs that come with it and in the future those funds will be earmarked for investors. Planning for a slimmer BHP is underway with the spin out of the oil business to Woodside on track for the March quarter

The message though from BHP prices for the most basic ingredients needed to build cars, houses and even mobile phones are going to push higher for the longer-term and this is going to be felt right through the economy.

That’s the view of Henry, with one of the world’s biggest miners reaping the benefits from a rebound in demand as the world comes out of the Covid crash, as underlying first half earnings more than doubled to $US9.44bn.

The bigger-than-expected dividend initially pushed BHP shares up 3.4 per cent on Tuesday to trade at a five-month high of $49.41, before a warning shot by Beijing on resurgent iron ore prices saw the miner end the day down 0.3 per cent to $48.18.

BHP’s Mt Whaleback mine. Even iron ore prices are recovering.
BHP’s Mt Whaleback mine. Even iron ore prices are recovering.

The commodities surge powering BHP is creating an inflation feedback loop. The risk becomes that prices hit such a level that any cure to surging inflation in the form of policy responses will be to sharply curb growth.

Global oil futures hit seven-year highs late on Monday and are expected to push higher as tension over Russia and Ukraine soars. Copper remains near record highs which were touched last June as inventories remain critically low. Aluminium hit a record high last Friday and iron ore prices are recovering from last year’s cyclical sub-$US100 low. On average BHP secured $US113.54 a tonne for iron ore during the December half, which is generating eye-watering profit margins at 71 per cent.

Henry said BHP is seeing “stark inflationary pressures globally”, with major value chains in food, construction materials, autos, energy and logistics all moving higher.

But it is important to understand the different drivers of this.

The mining giant expects supply chain bottlenecks to contend with “for another year or two”. But on demand led-inflation “we expect it to be more enduring”.

“This latter driver is positive for commodities demand and pricing,” Henry said.

Even BHP can’t escape of inflation which blew a $US600m hole in the bottom line. However Henry is managing the miner as though it was a low-commodity price cycle and doing all he can to keep his own costs down.

“We are doing a pretty good job of keeping a lid on costs and the expectation is we’ll do that in the period ahead, certainly better than the industry on average,” he added.

China confidence

BHP is boosting its confidence toward China’s outlook despite growth during the December quarter hitting the slowest pace in 18 months as regulators grappled with a hard landing on the apartment market. Sentiment around China remains the biggest driver of iron ore prices and Tuesday’s sharp fall shows Beijing has substantial clout over the direction of the metal.

He expects China’s headwinds including restrictions on property development to ease over the rest of the calendar year, helping to reignite growth while China’s exports will again pick up.

“As we move into the next (Beijing) five-year plan, the expectation is that there’s going to be a focus on growth, stability, economic stability, and, you know, probably a bit more infrastructure spending,” Henry said.

“So things are looking positive currently, in terms of the Chinese economic outlook, coupled with what’s happening in the rest of the world,” Henry said.

And after finally shedding its UK sharemarket listing late last year, Australia’s BHP is again prepared to use its clout to be more active for what it sees as the national interest.

BHP expects China’s economy to start picking up. Picture: AFP
BHP expects China’s economy to start picking up. Picture: AFP

Here Henry directly urged Western Australia’s McGowan government to re-open its state borders, with the Omicron wave passing so he can get a steady supply of workers back to his iron ore mines in the Pilbara.

“Clearly, governments needed to make tough judgments. But I think everybody, including the WA government would recognise that at some point, things have to return to normal.

“We believe that as do many others, that now’s the time for borders to get back up again”.

He also wants Canberra to take a bigger outward focus and pushed for more funding for DFAT to help “trade and engagement internationally”. While China wasn’t mentioned the message was clear.

The mining giant whose biggest customer is China has previously called out escalating tensions with Beijing as triggering trade restrictions on nearly $24bn worth of Australian exports.

The thinking inside BHP is given its full Australian status it is now prepared to advocate for policies which it sees as being in the long term interest of the Australian economy and the nation.

johnstone@theaustralian.com.au

Read related topics:Bhp Group Limited
Eric Johnston
Eric JohnstonAssociate Editor

Eric Johnston is an associate editor of The Australian. He has more than 25 years experience as a finance journalist, including a former business editor of The Australian. He has been business editor of The Sydney Morning Herald and The Age and financial services editor with The Australian Financial Review. His work has also appeared in The Wall Street Journal.

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Original URL: https://www.theaustralian.com.au/business/mining-energy/bhps-warning-on-inflation-pain-to-come/news-story/b8e74caab401f47e7c79d8f406205da5