Buffed

RESULTS ANALYSIS

Need To Know

• Lower commodity prices and inflation dragged on FY23 earnings.
• Capex heading to US$10-11bn pa as major projects evolve.
• Strong balance sheet and cash flow, plus world class assets, are a great long term combination, in our view. 

Investment Implications

Result overview:

Underlying EBITDA US$27,956m, consensus US$28,072m

Underlying net profit US$13,420m, consensus US$13,296m

FY23 - Iron ore price -18%, copper -12%, coal -25%

Free cash flow US$5.6bn, net debt US$11.1bn

FY23 result. Lower commodity prices (-US$9.2bn impact) were the main driver of the -31% fall in underlying EBITDA to US$27.9bn. Inflation carved off another US$1.4bn (labour, diesel and electricity the culprits) and the company expects the lag effect of inflation to persist into FY24.

Higher operating costs sliced US$1.3bn from last year’s outcome, but increased volume added US$1.5bn. Inventory drawdowns featured across all divisions for various reasons.

The average realised iron ore price for the full year was down -18%, copper -12% and coal -25% reflecting lower global demand for commodities. BHP noted that China and India demand is relatively robust in comparison which is where nearly 65% of group revenue is derived.

BHP acquired OZ Minerals during the year for US$5.6bn which was the main item pushing group net debt to US$11.2bn (gearing 18.7%) along with US$14.5bn of dividends. Target net debt range of US$5-15bn provides some flexibility to allocate capital according to the company framework.

Copper earnings (EBITDA) fell 22% to US$6.7bn on a 12% fall in the copper price offset by a 9% increase in production to 1.7mt of copper (FY24 guidance 1.72-1.91mt). Copper is on the threshold of a global grab as traditional demand is supplemented by the decarbonisation megatrend in which copper is the central commodity.

Iron ore prices fell 18% in FY23 dragging underlying EBITDA down 23% to US$16.7bn. Chinese steel production remains the key factor determining demand for iron ore with production over 1bn tonnes in CY23 for the fifth year in a row. At 135mt of crude steel production in India in CY23, the government is pushing for capacity to reach 300mt by 2030. This is enough encouragement for BHP to increase production to >305mtpa over the medium term and it is studying potential to reach 330mtpa.

Production of metallurgical coal was steady at 29mt with energy coal at 14.2mt. While met coal prices fell 22% in FY23, thermal coal prices jumped 9%. The re-opening of the Chinese import market to Australian coal had minimal impact. BHP is set to sell its Daunia and Blackwater coal mines and will retain its large Hunter Valley thermal coal mine (Mt Arthur) until closure in 2030.

Nickel looks set to become a more important commodity to BHP as demand for EV battery materials grows. Production and earnings are small for now, but the development of West Musgrave and Nickel West will be worth watching.

The Jansen Stage 1 potash project is 26% complete, aiming for production from end CY26. The capital cost is ~US$5.7bn. BHP sees a long term theme of rising population, changing diets and more sustainable agriculture as the drivers behind demand for potash.

Outlook. The acquisition of OZ Minerals has provided BHP with a chance to re-think its Olympic Dam impasse. BHP wants to develop a new copper precinct that can envelop the acquired Carrapateena and Prominent Hill assets together with BHP’s Olympic Dam and the undeveloped Oak Dam, just 40km from Carrapateena. On its own, Olympic Dam is as sizeable as it sounds, but BHP (and Western Mining before it) have failed to find the optimal way to put this asset up in lights where it belongs. Processing facilities are as important to the equation as mining which could unlock regional output of more than 500ktpa by 2030 or beyond. The SA copper precinct approach may finally unlock the huge potential here. The return on capital employed in South Australia is abysmal, but the near 30% ROIC being achieved at Escondida is indicative of what BHP could (should?) demand in SA.

The Chinese economy has been sluggish in FY23 forcing the government to stimulate, but BHP is uncertain of the impact on FY24 earnings. India, on the other hand, looks robust.

BHP said the cost of mining is now higher than it was prior to the pandemic. Although inflation appears to be easing, the company thinks the lagged effect of non-labour inflation (contract price resetting, for example) will impinge on FY24 earnings.

Capex of US$6.7bn in FY23 is about to step up to ~US10bn in FY24 and FY25 with medium capex pictured at ~US$11bn pa on average. Much of the increase in the short term is for Jansen Stage 1 potash (Canada) and the West Musgrave nickel operation in WA. Projects under study include Jansen Stage 2, the options for copper in South Australia and more copper in Chile. Further medium term growth in WAIO will attract yet more spending and the (almost) obligatory spend on decarbonisation will chew up more capital. Maintenance capex and decarbonisation capex will consume ~US$4bn through to FY30.

As usual, BHP’s underlying EBITDA in FY24 is most sensitive to any change in the iron ore price where a US$1/t change will impact earnings by US$227m. The USD:AUD will change earnings by US$147m for each 1c change. Given the steep fall in the AUD recently, this could be important in FY24.

Investment View

BHP has pivoted its portfolio towards what it describes as ‘future facing commodities’. Fortuitously, the global decarbonisation zeitgeist will supercharge demand for copper, nickel, and cobalt, while demand for iron ore and metallurgical coal seems unlikely to fade. This is occurring just as the Chinese urbanisation megatrend is ending, somewhat offset by the rise of industrialisation in India. While the world economy sorts itself out after the pandemic and the Russia/Ukraine situation, BHP sits atop some of the world’s largest and best resources of essential commodities.

For long term investors, BHP is a clear winner, in our view. At the current share price, we retain our Hold recommendation.

Figure 1: BHP FY23 underlying EBITDA factors