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BHP must dig deep to deliver in second-half, says Morningstar

Glenn Freeman  |  21 Feb 2019Text size  Decrease  Increase  |  
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BHP Group (ASX: BHP), the world's biggest miner, has reported a drop in first-half 2019 profit as a decline in copper earnings and a series of output disruptions boosted costs and resulted in missed opportunities for cost savings.

Underlying profit from continuing operations for the six months ended December 31 fell to $US4.03 billion ($A5.66 billion), down 8 per cent from the year before. That missed consensus estimates of $4.209 billion.

Declining ore quality at Escondida in Chile, the world's largest copper mine, led to higher costs as the miner had to process more ore, while falling prices also stunted copper earnings.

In response, Morningstar senior equity analyst Mat Hodge drops his earnings forecast for fiscal 2019 to US$ 2.20 a share – though he expects a lower tax rate to assist in the second-half.

"BHP will need a much stronger second half to deliver on production and cost guidance and our full-year profit expectations," Hodge says.

He has held his fair value estimate at $25.50, given earnings of US 76 cents a share were also flat half-on-half.

Hodge flagged the shuttering of Vale's Brumadinho mine in Brazil following last month's disaster, which has seen a short-term spike in coal prices and BHP's share price.

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"But more broadly, we still expect China’s steel demand to decline and for scrap to account for a greater proportion of supply. Iron ore and coking coal trade well above their respective marginal costs, a key reason we continue to see BHP shares as overvalued," he says.

Copper was the "laggard" with earnings before interest, taxes, depreciation and amortisation falling 40 per cent to US$ 1.9 billion - which largely reflects the lower copper price.

Big dividend ahead

Hodge says BHP remains in strong financial shape, with US$7.6 billion in free cash flow, benefiting from US shale production. This fed into a return to shareholders via an off-market buyback and US$ 1 a share special dividend.

He concedes the US 55 cents a share fully-franked interim dividend may have disappointed some in the market hoping for an increased payout or another special dividend with the result.

However, he thinks a large final dividend is likely, as near-term capital expenditure is unlikely to eat into free cash flow significantly.


is senior editor for Morningstar Australia

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