Higher commodity prices gifted BHP a bountiful half year result. The company is making some momentous changes to its asset portfolio that will position it strongly for a decarbonised future world.
In looking towards its future, BHP is repositioning its portfolio to benefit from global decarbonisation which pushes copper and nickel to the fore. Iron Ore remains core as it delivers the crude steel growth needed for infrastructure expansion. Fertilisers become the new kid on BHP’s block with the go ahead for the Jansen Potash project in Canada. Just as importantly, BHP is now jettisoning assets that do not fit the future vision including coal and oil and gas.
BHP’s shift from thermal and lower quality metallurgical coal has accelerated with the sale of its 80% stake in BMC (Qld JV metallurgical coal) for US$1.35 billion and the sale of its 33.3% stake in Cerejon (JV Colombian thermal coal).
The merger of BHP Petroleum with Woodside Petroleum will end BHP’s long history in the oil and gas industry. WPL will acquire the entire share capital of BHP Petroleum in exchange for new WPL shares that will be distributed to BHP shareholders. The merger will be completed in the second half of FY22 so that BHP will continue to own and operate the business until then. The Scheme Booklet containing all the detailed information on the merger is yet to be released, and this remains a key risk for BHP shareholders until that information is available.
The unification of BHP’s corporate structure was completed on 31 January 2022 at a cost of US$410 million (before tax). This removes the complexity of the Dual Listed Structure and gives a single BHP entity the opportunity to be more flexible and proactive in its management.
In copper and nickel, BHP already has world class assets and substantial room for growth for two metals that are fundamental to a decarbonised world.
Investment view
BHP is at a pivotal moment in its history as it exits the oil and gas business, scales down coal and increases its exposure to what it calls ‘future facing materials’, i.e., copper, nickel, potash, metallurgical coal and iron ore.
Financially, the company is in a powerful position to plan and execute the strategy and to reward shareholders along the way.
With 65% of revenue generated from China, and potentially more as petroleum exits, this presents a geopolitical risk for BHP that warrants close attention.
This is a good time to be owning BHP, especially from a yield perspective, but the share price is fairly valued in our view.
Risks to investment view
Demand and prices for commodities could decline, or operational costs could rise more than expected. There is transactional risk if the merger of BHP Petroleum and WPL does not proceed.
Recommendation
We have retained our Hold recommendation.
Higher coal prices were the surprise element in the result as demand for high quality metallurgical coal surged. The average realised price of iron ore at 31 December 2021 was US$158.17/wmt (FY21 average US$130.56/wmt) reflecting the slow down in Chinese crude steel production in the period which has since picked up again. Although it is now reported as a discontinued business, petroleum reported a very strong result. Copper price increases are being offset by unit cost production rises which could be 20-40% higher for FY22f. At the same time, copper production is being hindered by major maintenance at Olympic Dam and lower concentrator feed at Escondida. The long term prospects for BHP’s copper business remain very attractive with its world class assets and potential expansion options including Resolution Copper in Arizona (BHP 45%, RIO 55%) which is one of the largest undeveloped copper projects in the world. Total copper production at Escondida in the medium term is expected to reach 1,200ktpa from 1,020-1,080kt in FY22f.
BHP’s Climate Transition Action Plan sets a net zero operational emissions target by 2050. Under BHP’s 1.5oC scenario, which aligns with the Paris Agreement, the world is expected to need almost twice as much steel in the next 30 years as it did in the last 30. World copper production will need to double over the same period to keep pace with the development of renewable technologies including EVs and solar energy. Nickel production will need to quadruple to keep up with battery technology.
BHP’s balance sheet has US$6.1 billion of net debt and gearing sits at 10%. The company has revised its net debt target to between US$5-15 billion (was US$12-17bn) which will give some room for the expansion plans and consideration for further capital returns to shareholders. Capex guidance for FY22f is US$6.5 billion (US$3.7bn 1H22).
