BHP Group PLC (LON: BHP) – Expects FY21 Iron-ore production between 245 Mt and 255 Mt (“million tonnes”)

BHP Group PLC (LON: BHP) is a UK based mining Company, and it is engaged in the business of extraction and processing of minerals, oil, and gas. The Company is headquartered in Melbourne, Australia. Moreover, BHP is among the top producer of iron ore, metallurgical coal, and copper. BHP has four broader business segments – Petroleum, Minerals Australia, Minerals Americas, and Marketing. The Company is listed on the FTSE100 index.

On 20 July 2021, BHP will announce an operational review for the year ended 30 June 2021.

Recent trend of dividend payments

BHP had paid an interim FY21 dividend of USD 1.01 per share on 23 March 2021, while the ex-dividend date was 04 March 2021.

Growth Prospects and Risk Assessment

BHP had four major projects in petroleum, iron ore and potash, which are in the under-development stage, with a total budget of around USD 8.50 billion over the life of the projects. Moreover, the Company had signed a memorandum of understanding (MOU) with JFE, which is a Japan-based steel producer, to study the technologies required to make material reductions to greenhouse gas emissions from the integrated steelmaking process by investing around USD 15 million over the five years partnership. Furthermore, it had also signed MOU with China’s HBIS Group with a similar objective to invest another USD 15 million over the next three years. Meanwhile, BHP had also executed a 10-year PPA contract with Merredin Solar Farm in February 2021 to supply up to 50% of the Nickel West Kwinana Refinery electricity needs by 2024.

The Greenfield minerals exploration is focused on the identification of copper targets in Chile, Ecuador, Mexico, Peru, Canada, Australia, and the south-west United States. The drilling for the copper target is underway in the U.S., while the drilling of copper in Peru and drilling of Nickel in Australia will be planned during 2021.

(Source: Company presentation)

Furthermore, the Company had achieved its first production from the Bass Strait West Barracouta gas project during April 2021, and the Ruby project had progressed ahead of schedule. BHP would deliver the first production from the Ruby project by May 2021. Meanwhile, the final decision for Jansen Stage 1 project would be taken in the middle of 2021.

BHP is undergoing several significant risks, such as tailings storage facilities, geotechnical stability, non-process fire & explosion, and sales security & concentration. BHP is exposed to interest rate risk on outstanding borrowings and investments. The Company is also exposed to the risk associated with the prices of commodities, including sustained price shifts relative to the price of extraction.

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of BHP Group PLC. 

(Source: Refinitiv, Thomson Reuters)             

Operational Highlights (for the nine months ended 31 March 2021 (9M FY21), as of 21 April 2021)

• The Company had achieved record production at Western Australia Iron Ore (WAIO) as it had shown around 3% increase during 9M FY21 to around 211.3 Mt.  
• The total petroleum production went down by 8% to 76 MMboe (million barrels of oil equivalent) during 9M FY21.
• Nickel West production surged by 19% to 67 kt, driven by the strong performance from the new mines.
• Meanwhile, metallurgical coal production decreased by 2% to 29 Mt during the period.

Financial Highlights (for the half-year ended 31 December 2020 (H1 FY21), as on 16 February 2021)

(Source: Company result)

• The profit from operations had shown around 17% growth, underlying attributable profit surged by 16% YoY, with a stronger underlying EBITDA margin of 59%.
• The Company generated robust cash flows, with return on capital employed increased to 24%, net operating cash flow of USD 9.4 billion and free cash flow of USD 5.2 billion. This increment reflects strong operational performance and higher iron ore and copper prices.
• BHP has a strong balance sheet, with a net debt reduction of around 7% to USD 11.84 billion as of 31 December 2020, while it was USD 12.68 billion as of 31 December 2019.
• BHP had a gearing ratio (Ratio of Net debt to Net debt plus Net assets) of 18.1% as of 31 December 2020, while it was 19.5% as of 31 December 2019.

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 28 April 2021, at 08:08 AM GMT, BHP’s shares were trading at GBX 2,209.00, same as the previous day closing price. Stock 52-week High and Low were GBX 2,408.50 and GBX 1,257.87, respectively.

BHP's prices witnessed a sharp upside movement after the breakout of the Head & Shoulders Bottom pattern and sustaining above the breakout level for the past five months. As per the pattern's target projection, prices are expected to move further upside. The trend-following indicators 21-period SMA and 50-period SMA's are sustaining below the current market price and providing support at the lower end.

In the last five years, BHP’s stock price has delivered a positive return of ~144.50%; and it has outperformed the FTSE All-Share Basic Materials index with a return of around 133.48% and the FTSE 100 index with a return of about 10.22%.

Valuation Methodology: Price/Earnings Approach (FY21E) (Illustrative)

Business Outlook Scenario

BHP is well-positioned to tackle challenges presented by the Covid-19 uncertainties, which may persist for the short term. Furthermore, the Company had increased the guidance for copper production, while the production guidance for iron ore and petroleum remains unchanged for FY21. Moreover, it expects to produce copper in the range between 1,535 kt and 1,660 kt in FY21. The iron ore production is expected to be ranging from 245 Mt to 255 Mt in FY21. Metallurgical coal production is expected to remain between 39 Mt and 41 Mt, lower from previous guidance due to the adverse impact of wet weather during Q2 FY21 and Q3 FY21.

The nickel production is expected to be ranging from 85 kt to 95 kt. BHP had expected total petroleum production to be in the range between 95 MMboe and 102 MMboe. The Company had anticipated capital and exploration expenditure to be around USD 7.3 billion during FY21 and USD 8.5 billion during FY22 due to the stronger Australian dollar. In the medium-term, the Company expects to reduce the operational greenhouse gas emissions by at least 30% from 2020 levels by 2030, while it is establishing the trajectory to achieve the 2050 goal of net-zero operational emissions. Overall, BHP remained well-positioned to execute the major projects and bringing new supply in copper, petroleum, and iron ore.

(Source: Company presentation)

Considering the record iron-ore production at WAIO, robust balance sheet, strong iron-ore demand from China, increased guidance for copper production, strong financial performance, 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 2,209.00 (as on 28 April 2021 at 08:08 AM GMT), with lower-double digit upside potential based on 11.22x FY21E Price/Earnings (approx.) on FY21E earnings per share (approx.).

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

*The dividend yield is subject to change as per the stock price movement.

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