Iron ore strength overcomes coal, governance issues at major miners

Surging cash flows can hide a multitude of sins. Iron ore’s high price all through 2020 means that BHP (BHP) and Rio Tinto (RIO) will soon be announcing bumper years, although the latter mining heavyweight will be doing so under new chief executive Jakob Stausholm – after Jean-Sebastien Jacques resigned over the Juukan Gorge catastrophe last year. 

Rio said in its December-quarter update that production would meet expectations across most of its divisions, although the 2021 guidance has come below BMO Capital Markets' forecasts for copper and iron ore production. 

BHP reported similar positive iron ore production and guidance in its latest trading update, but flagged a $1.15bn-$1.25bn (£842m-£915m) hit from write-downs on its thermal coal business in Australia – NSW Energy Coal (NSWEC). The write-down comes from “current market conditions for Australian thermal coal”, a stronger Australian dollar and changes to the mine plan. China has recently blocked Australian coal imports, while overall coal production itself was hit by strikes in Colombia and bad weather in Australia. Covid-19 costs will be around $250m for the half. 

BHP has said it would sell off its thermal coal assets, “focusing on high-quality hard coking” – or metallurgical – coal. As well as NSWEC, BHP owns a one-third stake in the Cerrejon mine in Colombia, alongside Glencore (GLEN) and Anglo American (AAL). This week, a human rights organisation called the Global Legal Action Network (GLAN) said the three owners had broken rules on multinational dealings put in place by the Organisation for Economic Co-operation and Development (OECD). Miners will probably be more circumspect over corporate governance issues following the Juukan Gorge incident.

BHP and Anglo are trying to sell their Cerrejon stakes, while Glencore plans to hold onto its share until the mine runs out of coal. Outgoing Glencore chief executive Ivan Glasenberg has argued this was better for the environment than simply handing the operation over to another company. GLAN said the OECD would investigate possible human rights and environmental offences, and called for the three companies to “progressively close down the mine, restore the environment in the surrounding area to the fullest extent possible, and provide financial compensation to the affected communities”. 

The Cerrejon news comes weeks after BHP announced production had restarted at the Samarco mine in Brazil, five years on from the dam collapse disaster. 

This contributed to the first half improvement in iron ore production, which should drive BHP to a major increase in full-year earnings for the 12 months ending 30 June. Consensus estimates compiled by FactSet see cash profits hitting a six-year high of $29bn in 2021. Rio is forecast to hit a nine-year cash profit high for 2020 at $23bn.  

BMO Capital Markets analyst Colin Hamilton said Rio’s 2021 iron ore guidance of 325m tonnes (t) to 340mt indicated there would be “no legacy impact from Juukan Gorge”, in terms of production.

With stakeholder issues now to the fore, Rio has committed to “modernise and improve agreements” with First Nations people. One upcoming test of its new standards is the Resolution Copper development in the US. The project is owned and operated by Rio, which has a 55 per cent stake, while BHP holds the other 45 per cent. The project faces opposition because it will destroy Oak Flat, which "for many generations has been the heart of Apache religious and cultural practice", according to San Carlos Apache Tribal chairman Terry Rambler. The group has sued the US Forest Service over its approval of the plan. 

It has also to get the Mongolian government to sign off to changes to the Oyu Tolgoi underground expansion plan, as well as working out a financing solution with unhappy shareholders in Turquoise Hill Resources (Can:TRQ), the listed company through which it controls Oyu Tolgoi.

BHP’s 2020 copper performance was hindered by maintenance work at Escondida, although record throughput (tonnage processed) limited the year-on-year drop to 5 per cent, taking production to 572,200t. BHP has stuck with full-year guidance for the world’s largest copper mine, which at a high-end of 1mt will represent a 150,00t minimum drop on last year because of the Covid-19-hit workforce and development work. Another base metal zinc was a bright spot for BHP in the half, with production up 78 per cent on last year. Zinc prices hit an 18-month high of over $2,800/t in December. 

We have a buy recommendation on BHP at 2,158p, and hold rating on Rio at 6,009p. 

Last IC View for BHP: Buy, 1,811, 18 Aug 2020

Last IC View for Rio Tinto: Hold, 5,572p, 29 Dec 2020