BHP’s record year continues as coal drives up earnings

BHP (BHP) will be grateful it hung on to some of its coal assets after they kept its cash profit climbing in the 2022 financial year even as copper and iron ore prices came down. The major miner’s underlying cash profit for the year of $40.6bn (£33.8bn) was 16 per cent ahead of last year and almost double the 2020 financial year, during which iron ore prices soared. 

Global commodities markets have been roiled by the war in Ukraine and Covid-19 lockdowns in China, with the price of industrial metals such as copper and iron ore dropping from high levels since March, while coal prices soared off the back of higher demand. 

BHP’s coal division drove the record underlying cash profit as iron ore prices fell compared with last year. Coal contributed $9.5bn in Ebitda, compared to just $288mn last year, while iron ore saw a 17 per cent drop on the same metric, to $21.7bn. 

The final dividend of 175ȼ takes the year’s total to 325ȼ, a payout ratio of 77 per cent. 

Recent deals mean BHP has not fully enjoyed the bull market for coal, however. The company sold off its one-third interest in the Cerrejon thermal coal complex in Colombia in the period, as well as its 80 per cent stake in the BMC metallurgical coal mine in Australia.

Chief executive Mike Henry said the company had “improved its platform for growth” in the period, with the green light for the Jansen potash project and committing to copper and iron ore expansions on top of the coal asset sales. He added that new spending on coal in Queensland had been frozen after the state government brought in a royalty scheme that has hiked up its take when prices are high. 

The other key expansion option is the potential $5.8bn acquisition of Oz Minerals (AU:OZL), although the Australian miner has so far rebuffed BHP’s advances. Henry said on a call with analysts that Oz had still not engaged with his company on a deal, although the smaller company told shareholders last week there could be value in a tie-up. 

Looking ahead, the cash profit margin (one percentage point higher than last year at 65 per cent) will come under pressure from higher costs. The miner has guided to a 10 per cent cost increase at its iron ore operations, based on higher labour and diesel costs largely. Production will largely be flat on 2021 and 2020, although the company is pushing ahead with plans to get it from around 280mn tonnes a year to over 300mn tonnes. Spending will go up as a result, with the guided 2023 capital expenditure of $7.6bn well ahead of RBC Capital Market’s forecast of $5.9bn. 

BHP will take a hit from higher costs but its high margins and almost net cash position mean it is in good shape for a period of weakened industrial metals prices. Buy. 

Last IC View: Buy, 2,243p, 8 Aug 2022