Join our community of smart investors

BHP steels itself for coal divestments

Iron ore drives 2020 result for the Big Australian while lossmaking coal to get the boot
August 18, 2020

BHP’s (BHP) record iron ore production saw it float through the difficult second half of its financial year, with profits close to last year despite the pandemic. 

IC TIP: Buy at 1,811p

The world’s biggest miner confirmed its base metal and steelmaking focus for the future, committing to getting rid of its thermal coal and some metallurgical coal assets in Australia and Colombia. The coal division as a whole - including the “higher-quality” metallurgical product - saw an almost 80 per cent fall in underlying operating profit to $811m (£616m). 

Chief executive Mike Henry, who has been in the job since January, said these would either be sold or spun off in a demerger, as they would be “unlikely to compete for capital within BHP”.

He made a firm commitment to metallurgical coal overall, however, saying demand would grow for the steelmaking ingredient. 

The past 12 months have seen thermal coal prices hit multi-year lows and both New South Wales Energy Coal and the 33-per-cent-owned Cerrejón mine in Colombia fell to underlying operating losses.

The flipside to this shift is greater investment in copper and nickel, metals that are set to benefit from the decline of fossil fuels. 

In the 2020 financial year, BHP saw free cash flow from continuing operations fall 19 per cent to $8.1bn, and the final dividend of 55c per share took the year’s total to 120c, 10 per cent down on 2019. 

Iron ore was the standout commodity and division for BHP. It hit a record production of 248m tonnes (t), a 4 per cent increase on the year before.

The output increase and strong prices in the second half saw iron ore cash profits reach $14.6bn, a high not seen since 2012, a year when prices surpassed $140/t. 

Iron ore guidance for 2021 is 244m-253mt, although BHP warned of prices coming down as Brazilian supply increases. This will not be an immediate negative for the iron ore division, however, with prices currently close to $120/t and maintenance work needed at BHP’s operations in the Pilbara.

BMO analyst Colin Hamilton said even without a guidance adjustment, iron ore supply was tight enough for this maintenance news to trigger a 4 per cent uptick on the futures market. 

On top of getting rid of the thermal coal assets, Mr Henry announced a reshaped c-suite. Fellow chief executive aspirant Danny Malchuk and external affairs boss Geoff Healy are on their way out while Olympic Dam boss Laura Tyler has been promoted to chief technical officer. There is also a new finance chief on the way. 

This group, alongside the board, have big decisions to make in the coming years around exploration and M&A, especially given the new goals of expanding copper and nickel supply.

But looming ahead is the Jansen final investment decision. This has been pushed back to 2021 because of Covid-19 delays to the shaft sinking at the Canadian potash project. Billions have already been sunk into it, and BHP has made positive noises about future fertiliser demand, but it is still a massive project with plenty of risk involved.

Consensus forecasts compiled by FactSet see adjusted earnings per share falling next year to $1.69, a 6 per cent drop on 2020. 

BHP (BHP)    
ORD PRICE:1,811pMARKET VALUE:£ 91.6bn
TOUCH:1,811-1,812p12-MONTH HIGH:1,873pLOW: 940p
DIVIDEND YIELD:5.0%PE RATIO:15
NET ASSET VALUE:948pNET DEBT:23%
Year to 30 JunTurnover ($bn)Pre-tax profit ($bn)Earnings per share (ȼ)Dividend per share (ȼ)
201628.61.97-12030.0
201736.111.111183.0
201843.114.869.6118
201944.315.0167133
202042.913.5157120
% change-3-10-5.8-11
Ex-div:03 Sep   
Payment:22 Sep   
£1=$1.32 *Includes both ASX and LSE shares