BHP Group PLC (LON: BHP) – Production guidance remained intact for FY21.

BHP Group PLC is a FTSE-100 listed mining Company, which is involved in the processing of minerals, oil, and gas, primarily in the Americas and Australia. The global headquarter is in Melbourne, Australia. The Company is a global producer of metallurgical coal, iron ore, and copper. It also holds substantial interests in energy coal, oil, and gas. It is operating with an employee base of around 72,000 (including contractors), predominantly in the Americas and Australia.

The Group has two parent companies, BHP Group Limited and BHP Group PLC as it operates under Dual Listing Structure. It sells the products worldwide, with sales and marketing managed through Houston (United States) and Singapore. It has been around for 134 years, and presently, it operates in over 90 locations worldwide. The business operations include evaluation & exploration, development, extraction & processing, rehabilitation, and closure. The Coal business is involved in the mining of thermal (energy) coal and metallurgical coal. The Iron Ore business is involved in the iron ore mining process. The Copper business is involved in the mining of gold, uranium, molybdenum, copper, zinc, silver, and lead. Petroleum comprises of exploration, production, and development activities pertinent to oil and gas operations.

On 20 January 2020, BHP expects to announce operational review for H1 FY21 (half year ended 31 December 2020).

 (Source: Presentation, Company Website) 

Growth Prospects and Risk Assessment

The annual dividend yield of BHP is ~5.68%, which is higher than the dividend yield of the FTSE 100 index. The ROCE of 17% in FY20 reflects strong underlying performance despite difficult operating and market conditions. The outlook for the long-term global economic growth and commodity demand is likely to be positive with population growth and rising living standards, which shall drive the demand for energy, fertilizers, and metals.

(Source: Refinitiv, chart created by Kalkine Group)

(Source: Refinitiv, chart created by Kalkine Group)

BHP has a diverse and simple portfolio of tier one assets, which are of low cost, long-life, and expandable. Since 2016, it has returned ~US$36 billion to shareholders and reinvested ~US$35 billion, while the net debt (US$12 billion) kept at the low end of the target range (US$12-17 billion) in FY20. The ROCE of 17.0% in FY20 reflects strong underlying performance despite challenging operating and market conditions. The Company’s asset base can generate strong cash flows, which will boost the petroleum and copper production rate in both the short and long term.

However, there are certain risks and uncertainties to business growth. The Company is cautious about the outlook for key commodities in the short term as the rebound in Covid-19 cases could weaken the global economic recovery. Moreover, it operates in multiple geographies, and profits can be impacted negatively due to the foreign exchange rate fluctuations. Another round of potential lockdown could hamper supply chain and impact the business operations. Also, the price volatility of major commodities can massively impact the profitability and liquidity position too.

Peers Benchmarking

 (Source: LSE, chart created by Kalkine Group) 

Industry Outlook Dynamics

As per Technavio’s report, the global crude oil market is forecasted to grow by ~US$146.92 billion between 2020 to 2024, representing a CAGR of ~1% during the period. Also, the recent report from Global Market Insights estimated that the market size for Global iron ore pellets market is projected to reach nearly US$70 billion by 2026, representing a CAGR of ~3.2% between 2020 to 2026. Meanwhile, the Technavio’s report projected, the global copper market size is expected to grow by ~3,896 thousand metric tonnes from 2018 to 2022.

The population growth and rising living standards are likely to propel the future demand for metals, fuel fertilizers, and energy. The sustainable future market would also require decarbonization of stationary power and the electrification of transport. Moreover, the increasing adoption of iron-based chemicals, growing product consumption across MEA (the Middle East and Africa) region, and rising awareness regarding the reduction of carbon emissions from steel plants would act as catalysts to drive the market forward.

(Source: Chart created by Kalkine Group)

 (Source: Presentation, Company Website)

Key Fundamental Statistics

 Key Shareholders Statistics

FY20 Key Performing Indicators (KPI’s)

(Source: Company Website)

A Glimpse of Business Segments (FY20)

(Source: Company Website)

Recent Developments

On 20 October 2020: The Company announced the retirement of Shriti Vaderaas an independent Non-executive Director of BHP Group Limited and BHP Group Plc.

On 13 October 2020: BHP announced the appointment of Susan Kilsby as the Senior Independent Director for the Company, effective on 15 October 2020.

On 6 October 2020: The Company had signed a Sale Agreement and Membership Interest Purchase with Hess Corporation (Hess) to acquire an additional 28% working interest in Shenzi. Both companies (BHP and Hess) have agreed to a purchase price of US$505 million. This acquisition would bring 72% of BHP's working interest and approximately 11,000 barrels of oil equivalent per day of production.

Operational Update (for the quarter ended 30 September 2020 (Q1 FY21), as on 20 October 2020)

(Source: Company Website)

• The Company delivered a strong performance in metallurgical coal and iron ore, with an increase of 2% year-on-year in Group copper equivalent production and record production achieved at Jimblebar.
• All production and unit cost guidance stays unchanged for the financial year 2021, except for Cerrejón production guidance, due to an ongoing strike.
• The major project development in petroleum, copper and iron ore are progressing well, with achievement in the first production of Atlantis Phase 3.
• Despite the impact of Covid-19, the Company attained a solid concentrator throughput at Escondida and expects the first production from the Spence Growth Option between December 2020 and March 2021.
• In copper exploration, BHP delivered encouraging results in the third phase of the drilling program at Oak Dam, with strong foundations for unlocking the full growth potential of this asset.
• Iron ore has a strong supply chain performance, with an increase of 8% year-on-year in production (Sep YTD20).
• Lower production in Nickel, driven by planned annual maintenance at the Kalgoorlie smelter and Kwinana refinery.
• Overall, BHP has started the new financial year 2021, with strong production performance in Q1 FY21.

Financial Highlights (for the year ended 30 June 2020 (FY20), as on 22 September 2020)

(Source: Company Website)

• The Company witnessed a strong balance sheet, with a net debt of US$12 billion, which is still at the lower side of the target range of US$12 billion-US$17 billion, due to application of IFRS 16 Leases.
• The attributable profit and underlying attributable profit for FY20 stood in line with the last year’s performance.
• It generated net operating cash flow of more than US$15 billion for the fourth consecutive year, with a free cash flow of US$8.1 billion.
• BHP consistently delivering high cash returns to shareholders and is determined to pay a dividend of 55 US cents per share, with strong ROCE (return on capital employed) of 17%.
• The capital expenditure stood within guidance and expected expenditure related to capital and exploration would be approximately US$7 billion for FY21.
• It also remained focused on maximising cash flow and managed to deliver robust earnings with free cash flow generation.
• Moody’s and Standard & Poor’s credit ratings of the Company remained at the A and A2 level, respectively throughout FY2020.

Financial Ratios

Reported profitability metrics for the financial year 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Also, it has decent fundamental metrics as it has maintained an EBITDA margin above 50% for the last four years. BHP Group Plc has delivered a substantial return for the shareholders’ as return on equity (ROE) of 16.7% was higher as compared to the industry median of 2.5%. The ROE recorded by the Company in the past three years was considerably above the industry median.

On the liquidity front, BHP Group Plc’s current ratio was lower than the industry median of 1.45x, but it has sufficient liquidity to meet short-term obligations and has robust liquidity profile to tackle the uncertainty due to COVID-19 outbreak. On leverage front, the debt-equity ratio was 0.56x, which was higher as compared to the industry median of 0.40x, reflecting that the Company is high leveraged as compared to the industry. 

Share Price Performance Analysis

(Source: Refinitiv, chart created by Kalkine Group)

On 21 October 2020, at the time of writing (before the market close, at 9:41 AM GMT+1), BHP Group Plc shares were trading at GBX 1,597.80, down by 0.96% against the previous day closing price. Stock 52-week High was GBX 1,873.00 and Low of GBX 939.80, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 200-Day (GBX 1,581.00) simple moving average price. Also, 14-day RSI (oversold zone) is currently supporting an upside move (around 26.13 level), which means the stock price could increase in the short term.

(Source: Refinitiv, chart created by Kalkine Group)

In the last six months, BHP’ stock price has delivered ~31.01% return as compared to ~3.51% return of FTSE-100 index, which shows that the stock has outperformed the benchmark index during the past six months. However, FTSE All-Share Mining Index has also yielded an attractive return of ~31.68% during the same period.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

BHP has started Q1 FY21 strongly with safety measures, and therefore, production guidance remained intact. In Australia, Olympic Dam registered its best quarterly performance in the past five years. In Petroleum, BHP delivered first production through Atlantis Phase 3 ahead of schedule and acquired 28% interest in Shenzi. In Copper, the Company witnessed promising exploration results from Oak Dam. In Nickel, BHP completed the acquisition of Honeymoon Well and bolstered position with an exploration alliance in Canada.

The potential for re-emergence of Covid-19 outbreaks in supply jurisdictions or key markets is keeping the outlook uncertain. The Global crude steel production is likely to decline in 2020 though long-term prospects seem favourable. The prices of iron ore and coal have also weakened off lately. Adjacently, the crude oil price has also been experiencing volatility in the second half of 2020. However, BHP has a strong balance sheet with high quality and diversified portfolio of assets to show resilience against uncertain commodities market. The Company is confident towards the demand for products in the medium period to longer-term period with the generation of solid cash flow.

 (Source: Presentation, Company Website)

Considering the solid production performance in Q1 FY21, robust balance sheet, strong cash returns, and support from the valuation as done using the above method, we have given a “BUY” recommendation on BHP Group at the current price of GBX 1,597.80 (as on 21 October 2020, before the market close at 9:41 AM GMT+1), with lower-double digit upside potential based on 7.05x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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