This Post Market Wrap is presented by KOSEC – Kodari Securities

• Iron ore and coal production volumes and prices remain strong
• Copper and nickel production volumes impacted by COVID related labour shortages   
• Potash projects under development in Canada remain on track 
• Merger of BHP’s oil and gas interests with Woodside Petroleum set for completion on 1 June
• Skill shortages and overall labour market tightness expected to continue into 2023
• Long term outlook supported by rising living standards, global population growth and future infrastructure expenditure on decarbonisation solutions.

BHP is a world leader in producing and processing mineral commodities. It has 80,000 employees and contractors, based primarily in Australia and the Americas. BHP is the world’s lowest cost major producer of iron ore. The Company also produces copper, nickel and metallurgical coal at scale and has committed to a significant investment in potash, a natural ingredient for fertiliser.  

March 2022 Operational Review 

COVID induced skilled labour shortages and wet weather have hampered BHP’s production activity during the March quarter, according to production volume details released this morning. However, record high prices for metallurgical coal and continuing high prices for iron ore are supportive of a satisfactory June 2022 financial year profit result.

BHP confirmed its original 2022 production guidance for iron ore, metallurgical coal and energy coal. The Company is taking advantage of record high prices for higher quality energy coal by increasing the proportion of thermal coal sourced from its NSW Energy Coal mine sites. 

Full year copper production guidance has been reduced to between 1570 and 1620 kt, from between 1590 and 1760 kt, and actual production is down 10 percent for the 9 months to March 2022, compared to the 9 months to March 2021. The reduced operational workforce, as a result of significant increases in COVID-19 cases, has resulted in lower production volumes from BHP’s Escondida mine in Chile. Similar operational workforce constraints in Western Australia have cut nickel production volume by 13 percent in the March quarter, compared to the March 2021 quarter volume. BHP has lowered nickel production volume guidance for the year by about 10 percent from original estimates.  

BHP’s potash projects in Canada are tracking to plan with the initial production target dates of calendar year 2027 remaining firm. 

The merger of BHP’s oil and gas interests with Woodside Petroleum is set for completion on 1 June, following Woodside shareholder approval on 19 May. 

Looking Ahead

The BHP earnings outlook remains cautious. 

BHP has previously flagged higher labour costs arising from COVID related skilled labour shortages and this cost imposition had been factored into market earnings estimates. However, BHP’s warning that 2022 guidance is subject to further potential negative impacts from COVID-19 during the 2022 financial year remains a lingering cause of concern. 

The Company also warned that market volatility and inflation pressures have increased further because of the Russian war on Ukraine.  Skill shortages and overall labour market tightness is anticipated to continue in the period ahead, in both Australia and Chile. Furthermore, BHP do not expect these conditions to improve until the 2023 financial year.

Although the BHP production outlook is facing short term headwinds, the long-term picture remains positive. Global population growth, future infrastructure expenditure on decarbonisation solutions and rising living standards are driving demand for clean energy, metals and fertilisers. BHP is leveraged to these global mega-trends, implying consistent earnings growth over the long term. 

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.