BHP warns on nickel but interim profits climb

Weak nickel prices have put a speed bump in major miners’ narratives about the shift to ‘transition metals’ providing the next few decades of profits. BHP (BHP) took a $2.5bn (£2bn) hit in its interim results on the value of its Australian nickel holdings, while chief executive Mike Henry said the company would consider suspending production at the Nickel West mine in the coming months. 

“We do expect [the supply glut] to continue til the end of the decade,” he added. Chinese-funded production from Indonesia has sent the nickel price tumbling in the past year. 

It is only a small part of the company’s portfolio, but growth projects would have increased nickel’s importance to earnings in the coming years. BHP had already reversed plans to sell Nickel West in 2018 as the metal grew in importance for the lithium-ion battery industry. Now the growth project West Musgrave (part of the Oz Minerals acquisition) is under review and Nickel West could be put on care and maintenance. 

Despite the gloom, BHP’s major earnings drivers performed better in the first half, with higher iron ore and copper prices balancing out cost increases. The company reported flat underlying profits for the first half of $6.6bn and a 5 per cent higher underlying cash profit of $13.9bn. Earnings were slightly behind analyst forecasts, with adjusted Ebitda expected to be $14bn. 

The higher figure overall was driven by a 27 per cent rise in underlying Ebitda for the iron ore division, at $9.7bn, with even a weaker China hitting “record iron ore consumption” in 2023, BHP said. 

Copper also benefited from higher prices, with underlying cash profits up almost a quarter. The company is sticking with its copper growth plans, and market experts have recently forecast a slide into deficit for the metal this year given supply issues globally. Previously, demand was only set to outpace supply later in the decade. 

The miner has kept guidance for output and costs for the full year for all units except coal, which had its outlook cut in the operational results last month. Costs for metallurgical coal climbed in the half while production fell, resulting in a 43 per cent drop in underlying Ebitda to $800mn.

Outside volatile commodity markets, BHP’s balance sheet is also facing some pressure from the Samarco dam failure. The company added $2.6bn to its Brazilian payouts provision, while a class action case is also moving through the courts in London. This is not captured in the total $6.5bn provision for the dam failure.  

These interims show the juggling Henry and the rest of the executive team must do in the coming years, between capital return, putting billions into growing (or even maintaining) iron ore and copper production, and picking the right growth areas. A clearer plan should be in place by the full-year results. Buy.

Last IC View: Buy, 2,611p, 28 Dec 2023