Growth is back on the agenda for BHP with capex to arise from its slumber and even some acquisition activity may feature. Elevated commodity prices again bolstered the huge result, this time from coal in particular, but higher inflation photo-bombed the party.
The full year dividend of US325cps surprised the market and was made possible by the lower net debt of just US$333 million (gearing 0.7%). Free cashflow jumped from US$19.4 billion in FY21 to US$25.2 billion in FY22 as capex dwindled to US$5.8 billion.
The capex budget is about to get busy in the next few years. FY23f capex will come in around US$7.6 billion. Plans include the Jansen potash Stage 1 execution and a 300mtpa+ medium term target for WAIO, with studies underway for 330mtpa. Other options in copper and nickel will attract spending as well. The Oz Minerals bid has been met with opposition, but it is such a logical acquisition for BHP (the unquantified synergies could be large) given the proximity to the woefully underperforming Olympic Dam. Given the size of the resource at OD, it is a travesty that this world class resource has repeatedly failed to become as material as it deserves. BHP is a participant in three of the world’s best and largest copper resources – OD, Escondida and Resolution although the latter is mired in US environmental opposition.
BHP Coal delivered more EBITDA than its copper division in FY22. Coal’s big performance was mostly due to extraordinary prices with average metallurgical coal prices of US$423.82 in 2H22 some 269% ahead of 2H21. Geopolitical disruptions (Russia/Ukraine), China’s uncertain import policy and the knock-on effects of trade flow impacts suggests higher coal prices may persist, especially for metallurgical coal. BHP sees that a shift away from blast furnace steel-making is decades away. Demand for seaborne hard coking coal will expand as steel production in countries like India continue to grow.
Unit cost guidance is rising across all commodities. Higher diesel and acid prices contributed -US$660 million to group underlying EBITDA while inflation snipped a further US$867 million from the outcome. BHP did get a US$1.18 billion kicker from the AUD and CLP (Chilean peso) against the USD. BHP is guiding for unit production costs at Escondida to lift from US$1.20/lb in FY22 (was US$1.00/lb FY21) towards US$1.25-1.45 in FY23f. WAIO unit costs (excluding freight and royalties) will rise from US$16.81/t in FY22 towards US$18-19/t in FY23f. BMA (Qld coal) will see unit costs lift from US$89.06/t in FY22 to US$90-100/t in FY23f. FY23f unit cost guidance is based on an exchange rate of AUD/USD 0.72.
Investment view
BHP’s pivot to ‘future facing commodities’ is sensible and builds on its already substantial portfolio in copper and iron ore. The renewed interest in nickel has partly instigated the bid for Oz Minerals, which also has copper and could resuscitate the underachieving Olympic Dam. BHP CEO Mike Henry claimed that OZL was not a ‘must have’ which begs the question ‘why bid?’ If the speculation is correct that BHP’s view of the EV industry is very bullish, then OZL should be a ‘gotta have’.
Despite the phenomenal contribution from coal in FY22, this division remains on the outer. The sale of BMC in May 2022 and the attempted sale of NSW Energy Coal signals an active intention to divest more assets over time.
The final dividend of US175cps included US60cps above BHP’s minimum 50% payout policy. The company’s capital management framework allocates that excess capital between shareholder returns (dividends and buybacks), financial stability (the balance sheet gearing) and expansion (organic development and acquisitions/divestments). If the medium term objective is to increase capex on future facing commodity projects, the additional dividend element may come under some pressure.
It’s interesting to note that in FY14, just prior to the demerger of South 32, BHP’s total asset base peaked at just over US$151 billion. Now that BHP Petroleum is also gone (and the US shale assets not there either), the balance sheet is under US$100 billion in assets for the first time since FY10. Being more concentrated on higher returning assets like WAIO (ROCE 75%) and copper (Antamina 53%, Escondida 34%), the company can produce better results for shareholders.
We think the company is nicely poised but the risk part of the equation is becoming more pronounced.
Risks to investment view
Demand and prices for commodities could decline, or operational costs could rise more than expected. There is heightened geopolitical risk currently and inflation is a key operational concern.
Recommendation
We have retained our Hold recommendation.
Figure 1: FY22 Underlying EBITDA Factors
Figure 2: FY23 EBITDA Sensitivities
Figure 3: Average Realised Prices
Figure 4: Capital Management Framework
Figure 5: BHP Coal EBITDA
Figure 6: BHP Queensland Coal EBITDA
Figure 7: BHP Underlying EBITDA Factors
Figure 8: BHP Geographic Revenue
