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Where next for BHP shares after solid half-year results?

BHP shares have fallen over the past month as investors consider the outlook for Chinese iron ore demand alongside slumping nickel prices.

bhp Source: Bloomberg

BHP (ASX: BHP) shares initially rose after strong half-year results, but the ASX miner has since fallen by 4.3% to AU$43.59 in the past month of trading — and briefly fell to as low as AU$41.95 last week. The company is tied to iron ore and copper prices, though it is the rout in the nickel market which could be starting to cause some economic headaches.

BHP share price: half-year results

Revenue increased by 6% year-over-year to $27.2 billion, driven by relatively elevated iron ore and copper prices. Accordingly, underlying cash profit rose by 5% to $13.9 billion — though unit costs also rose by 5.4% as inflation continued to bite into margins.

While free cash flow increased by 9% to $3.8 billion, net debt rose by $1.4 billion in the six month period to $12.6 billion. The board therefore lowered the interim dividend by 20% to $0.72 — though arguably, the biggest reason for the dividend cut was the write down of the value of BHP’s nickel operation in Western Australia due to new lower nickel price assumptions. The company has taken on a non-cash net charge of US$2.5 billion.

The good news is that while Chinese demand is no longer as strong as the company may like, Western Australia Iron Ore, which produces most of BHP’s iron ore, has some of the lowest production costs in the world. Costs are also relatively low at the company’s Escondida copper mine in Chile — and in an inflationary environment, this does make BHP’s margins perhaps more attractive than those of its rivals.

A growth area to watch remains the Jansen project in Saskatchewan, Canada, which is set to become one of the world’s largest potash mines. Importantly, the fertilizer remains in constant demand, so is a valuable diversification for BHP which remains exposed solely to cyclical metals. The major expects to start first production in 2026.

Nickel woes

As noted above, a ramp-up in ‘dirty’ nickel operations in Indonesia has helped spark a crash in nickel prices — and forced BHP to recognise a US$2.5 billion impairment on its Western Australia Nickel project. BHP CEO Mike Henry notes that while shuttering Nickel West could see 3,000 job losses, the project has ‘the need for a major smelter rebuild coming towards us, which is many hundreds of millions of dollars in capital expenditure. Looking at this we've said it clearly isn't sustainable.’

Further, CFO David Lamont argues that ‘30% of the Australian nickel market has gone offline and another 30% is under pressure.’ While some activists argue that western buyers need to make a distinction between ‘dirty’ and ‘clean’ nickel production, the wider argument remains that Australian labour costs are becoming too onerous compared to those in the US or Canada.

Lamont also cited the tax rate, noting that ‘In Queensland at the moment, it's in excess of 62% as the effective tax rate. So it's a high taxing regime.’

However, India remains a bright spot on the horizon. Incoming CFO Vandita Pant enthuses that ‘As India continues to build its country's infrastructure, manufacturing base, steel will continue to increase in production in India. We expect the Indian production of steel to double by the end of this decade.’

BHP remains a popular ASX mining stock after half-year results, but the company’s trajectory in the near term arguably continues to be beholden to strong demand for iron ore — and this demand itself tied to demand strength in China.
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