BHP remains compelling despite profit and payout drop

The world’s biggest miner and the world’s biggest consumer of metals are interlinked, and so China’s slow growth this year equals lower profits at BHP (BHP). The ‘Big Australian’ reported adjusted earnings of $12.9bn (£10bn) for the 2023 financial year, which ended 30 June. 

This was down 58 per cent from the year before as iron ore and coal prices fell in the period. The company kept to production guidance at its key iron ore and copper divisions, and even with higher costs met consensus guidance for Ebitda (earnings before interest, tax, depreciation and amortisation of $28bn. The biggest hit came from lower prices, which knocked $9bn off underlying Ebitda, as well as higher costs. 

Despite meeting the profit expectations, management undershot the forecast for the final payout, at a total of 170¢ compared with 325¢ last year. 

Uncertainty remains over the lengths to which the Chinese government will go to prop up its housing industry – BHP is bullish enough to forecast that iron ore will remain above $80 a tonne, compared with the current price of just over $100 a tonne. 

Chief executive Mike Henry said there had been a shift in stimulus policy coming out of the Covid-19 slowdown, making it harder to predict the immediate impact. “The pace at which those [policies] are being translated in practice and change in behaviour on the ground is slower than we were expecting,” he said, adding that it was a more “nuanced and finessed” approach to bringing on growth in the country. BHP was also keen to highlight growth prospects in India. The country accounted for $3.4bn of BHP’s sales in the year, or 6 per cent of the total. This made it the company’s third-largest market behind Japan and China. 

The Pilbara iron ore unit contributed $16.7bn in underlying Ebitda, at a margin of 67 per cent – only slightly down from the 71 per cent margin last year. 

BHP’s second-largest earnings driver behind iron ore is copper. That division reported underlying Ebitda of $6.7bn, down 22 per cent on 2022. Spending will rise significantly in the coming years as well, as further investment in the Escondida copper mine is needed, and as the portfolio additions from the Oz Minerals buyout are built into working mines. Between 2023 and 2024, capital expenditure is forecast to grow from $2.7bn to $4.2bn. 

“The current surplus [in the copper market may last] another couple of years, but certainly the further we progress into the decade, it’s hard to see where the supply will come from,” Henry said. The company’s choice from here is how much to spend on Escondida to balance out a decline in grade. Production is expected to climb from the current 1mn tonnes of copper a year to 1.2mn-1.3mn tonnes in 2026, but from there a new plan is needed. BHP will spend $280mn in the next two years on working out the best course of action. 

BHP’s margins were once again impressive, even as costs rose and prices fell. Even while entering a building period and yet more macroeconomic uncertainty, this remains a compelling mining stock. Buy.