On 22 January, investors in BHP (BHP) were forewarned that maintenance work and production outages had pushed unit costs above guidance. A month on, the $600m (£465m) negative impact on the productivity drive has been cemented in interim numbers, and is now expected to extend to $1bn for the full year, thereby removing a key lever of controllable cost improvements.
Over the same period, those investors will also have noticed the 14 per cent rise in the miner’s share price. As is often the case in the world of commodities, the disconnect can be explained by near-term movements in commodity futures curves; in this instance, the recent run-up in the price of oil, copper, and especially iron ore.
As such, the market took an otherwise disappointing set of results in its stride. That may have been helped by the declaration of an interim dividend of $2.8bn, which arrives shortly after a $1.02-a-share special award, and a full 25 percentage points above the group’s minimum payout ratio. If such a bullish move is to be replicated at the full-year stage, BHP may need some further assistance from prices, particularly in copper, where declining grades and rising costs contributed to a drop in the group-wide return on capital employed from 17 to 15 per cent.
Chief among the copper division’s ailments is Escondida. Full-year output from the Chilean mine is expected to come in towards the lower end of the 1.12-1.18m tonne forecast, which helps to explain BHP’s hunt for new sources of the red metal, either from its own digging in south Australia or elsewhere.
One might have seen last year's exit from US shale as a portent of dimming hopes for that other perennial drag on investment returns: petroleum. But the recent approval of new production in the Gulf of Mexico and drilling at the Trion field, at a collective cost of $950m, suggests the BHP board still sees value in the black stuff.
Another commodity that can still compete for cash is potash, via the Jansen project in Canada. Though still classed as a “strategic option”, the development will suck up $240m of capital this year, and the miner saw fit to provide a positive commentary on the fertiliser market, where it expects a supply deficit “by the mid to late 2020s”.
Analysts at BMO forecast pre-tax profits of $17.7bn and earnings per share of $2.03 for the year to June 2019, rising to $18.7bn and $2.18 per share in FY2020.
| BHP (BHP) | ||||
| ORD PRICE: | 1,766p | MARKET VALUE: | £97.6bn | |
| TOUCH: | 1,766-1,767p | 12-MONTH HIGH: | 1,805p | LOW: 1,286p |
| DIVIDEND YIELD: | 5.2%^ | PE RATIO: | 22 | |
| NET ASSET VALUE: | 1,001¢*^ | NET DEBT: | 18% | |
| Half-year to 31 Dec | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢)^ |
| 2017 | 20.5 | 6.51 | 37.9 | 55 |
| 2018 | 20.7 | 6.80 | 71.0 | 55 |
| % change | +1 | +5 | +87 | - |
| Ex-div: | 7 Mar | |||
| Payment: | 26 Mar | |||
| £1=$1.29.*Reflects both UK and Australia-listed shares. ^Excludes special dividend of 102¢ per share paid on 30 Jan. | ||||
