Australia | Apr 23 2020
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
BHP Group retains a reasonably robust outlook for its key commodities, despite restrictions, as some development projects are deferred or delayed to shore up capital in the event conditions deteriorate.
-Production guidance reiterated for petroleum, iron ore and coking coal
-Tailwind from lower Australian dollar likely in FY20
-Capex budget for FY21 likely to be lower
By Eva Brocklehurst
The weather played a large part in a soft March quarter, affecting BHP Group's ((BHP)) oil and coal production on Australia's North West Shelf, Queensland and the Gulf of Mexico.
Nevertheless, brokers consider the company's range of commodities and geographies provides for a robust outlook, despite the restrictions on movements emanating from the lock-downs in several countries.
Regardless of stronger demand in China, the company anticipates other major economies, such as the US, Europe and India will contract sharply in the June quarter. Steel production ex China could contract in double-digit percentage points in 2020, while the scale of the loss of demand in oil means storage capacity globally is likely to be tested.
What remains consistent, in Credit Suisse's view, is that development projects are going to shift further out, as movement of people and goods is restricted and non-essential expenditure is curtailed in the event conditions worsen.
Still, the broker points out that Western Australian iron ore is on the way to a record year and key developments such as South Flank (iron ore) and Mad Dog (oil) are on track. A deferral of Jansen (potash, Canada) is also considered a positive. In fact, Credit Suisse speculates whether this may be the perfect opportunity to defer a decision on Jansen for a much longer period.
Production Outlook
BHP Group has reiterated FY20 production guidance for petroleum, iron ore and metallurgical (coking) coal. As a result of China's dominance, weakness outside of China in iron ore is considered less instrumental in price formation than it is for other commodities.
While the diversity of metallurgical coal demand is a long-term advantage for BHP Group, this has become more of a difficulty in current circumstances, brokers ascertain. Yet guidance for metallurgical coal production is unchanged, albeit expected to be at the lower end of ranges. High levels of rainfall have affected production at Peak Downs and Blackwater in Queensland.
Meanwhile, Cerrejon thermal coal output in Colombia is pending review, largely because of virus-related restrictions. Guidance for nickel production in FY20 has also been lowered to 80-83,000t from 87,000t.
In copper, guidance has been lowered for Olympic Dam in South Australia, as a result of smelter downtime, while Chilean production is unchanged for Escondida and Spence (pending review) and withdrawn for Antamina.
A decline in demand outside of China for copper is expected be less severe than for steel. Industrial weakness in copper has been offset by supply disruptions while current prices are depressing scrap availability, UBS notes.
BHP Group has a small number of confirmed COVID-19 cases amongst its global workforce of 72,000, all of whom have recovered or are recovering. The company has reduced the number of people at its mine sites and changed rosters to reduce workforce movements. Workers are also given regular health screenings and temperature checks before boarding aircraft or buses and when entering sites.
Capex Budget
As the Australian dollar is around -10% lower than BHP Group's assumed rate, UBS expects a tailwind from costs in the full year result. The broker also expects a 12-month delay to the Scarborough (gas) final investment decision, to mid 2021, and this should contribute to a reduction in capital expenditure. BHP Group has flagged a review of its FY21 expenditure budget of US$8bn and UBS calculates this is likely to be closer to US$6.6bn.
Morgans considers BHP Group has a critical advantage in 2020, with a superior dividend yield compared with other sectors such as banks. However, Macquarie lowers its final dividend assumptions to a 50% pay-out ratio from 70%, expecting the company will take a more conservative approach because of the uncertain outlook.
Ord Minnett also finds that, while a global recession presents significant downside risks for commodity prices, BHP Group's strong balance sheet and exposure to relatively firm iron ore prices means the stock is compelling.
There are six Buy ratings and one Hold (UBS) on FNArena's database. The consensus target is $37.10, suggesting 27.6% upside to the last share price the dividend yield on FY20 and FY21 forecasts, on present FX values, is 6.3% and 6.4% respectively.
See also, Does BHP Group Deserve This Hammering? On March 18, 2020.
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