BHP rides a breaking iron ore wave

The miner will hand back a total of $17bn (£14bn) to shareholders with the final dividend of 78¢ a share. While this is a record final dividend, the majority of shareholder returns – $10.4bn – have come through the share buyback and special dividend funded by the sale of the onshore US oil and gas assets to BP (BP.). Underlying profit was up 2 per cent year on year at $9.1bn but a hefty 12.9 per cent below consensus forecasts. 

The iron ore price hit $120 a tonne (t) in the first half of 2019 after the Vale tailings dam collapse at Brumadinho in Brazil saw global supply cut, while a cyclone hit production in the Pilbara. 

Chief executive Andrew Mackenzie was quick to manage expectations on future earnings, pointing out the recent drop in iron ore prices and weaker growth forecasts for China. “There is some indication now coming from our markets that that strength of demand is not as it was through the peak period in China,” he said on an analyst call. 

BHP’s iron ore production was flat year on year at 238m tonnes and costs were slightly below the 2018 figure at $14.16 a tonne, thanks to a weaker Australian dollar. Exceptional losses were extensive for the year, with Samarco clean-up costs coming in at $1.1bn. “Unplanned outages” across the group and the grade falling at the Escondida copper mine also cost $800m each in underlying improvements in productivity. BHP had set itself a $1bn target for productivity improvement in the year, which it defines as changes in cash costs. BMO analyst Edward Sterck said the group had possibly overreached with its goal, even with the weather hit doing the most damage. “It is good to have targets but BHP's appear permanently just out of reach,” he said. 

Capital expenditure on continuing operations climbed 22 per cent on the 2018 financial year to $7.1bn, and is expected to hit $8bn in 2021, the miner said. Its underlying return on capital employed climbed from 14.4 per cent last year to 16.1 per cent in the 2019 financial year, as both average capital employed and underlying profit after tax fell. 

Consensus forecasts compiled by Bloomberg put BHP’s June 2020 cash profits and adjusted EPS at $26bn and 228¢, respectively, narrowing to $23bn and 193¢ in FY2021.