BHP cuts interim dividend but remains bullish on macro conditions

The mining world has crested the hump of pre-inflation conditions that combined with high prices to drive record earnings and payouts across 2021 and 2022. 

These declined significantly for BHP (BHP) in the first half of the 2023 financial year, as weaker Chinese demand sent iron ore and copper prices down in the period. This has led to a slashed dividend, down from 150ȼ (124p) a share in the FY2022 first half to 90ȼ for this interim payout. Management stressed this came with a payout ratio of almost 70 per cent, compared with the usual goal of 50 per cent, given net debt sits at the low end of its target range.  

BHP also doubled down on its coal approach, announcing a plan to sell off two metallurgical coal mines that supply the steel industry, as they are outside its high-grade strategy. The coal market became inverted in the past year as thermal coal – which is lower grade than the steelmaking ingredient – became the more expensive variant given the massive demand from power stations. BHP sold off its last thermal coal assets last year as part of its “future-facing” materials strategy, and Glencore (GLEN) has reaped the rewards after taking its stake in the Cerrejon asset in Colombia. 

Higher costs also knocked underlying profits, which missed analyst expectations at $6.6bn (£5.5bn). This was a third down on a year ago. Cash profits were $13.2bn against the consensus forecast of $13.9bn, while the underlying cash profit margin came down from 64 per cent to 54 per cent. 

Chief executive Mike Henry said the second half of the financial year would potentially see stronger profit numbers, as certain unit costs come down. 

He was also hopeful that China’s reopening would continue to drive up metals prices. “We expect domestic demand in China and India to provide stabilising counterweights to the ongoing slowdown in global trade and in the economies of the US, Japan and Europe,” he said.  

A strong Chinese rebound is largely priced in to major mining share prices and metals prices, with steep climbs in both in recent months. 

The commodity with the most uncertainty surrounding it is copper, BHP’s second-highest Ebitda contributor. That's down to the potential for as much as 20 per cent of global supply not making it to market this year due to mine disruption. This could drive prices back up to $10,000 a tonne, investment bank Bernstein said this week. The metal has traded around $9,000 a tonne this month. 

Even if prices get stronger, costs have recently become tougher to manage for BHP. 

Its key West Australian iron ore division saw unit costs climb 13 per cent, while Escondida, the world’s largest copper mine owned 57.5 per cent by BHP, saw costs climb 12 per cent to $1.44 per pound. Production numbers were positive, however, staying within guidance and even recording a new best-ever six months for iron ore production at 130mn tonnes. 

The fallout from the Samarco dam disaster continues, with the miner forecasting almost $2bn going to recovery spending in the 2023 financial year, on top of another $915mn for the Renova Foundation announced in December. A class action lawsuit is also in progress in the UK, in which the claimants are looking for $6bn in damages. BHP filed a defence in December, saying the action duplicates cases in Brazil and existing remediation work. 

Ideally, metals prices will keep earnings high through this period, but this is not a given. We see a clear long-term strategy here, and this half’s profit and payout level are still strong. Buy. 

Last IC View: Buy, 2,327p, 16 Aug 2022

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