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BHP’s production report is good but not great

The much anticipated BHP production report will be met with a bet each way call.

The overall picture is relatively strong; three commodities had record prints in copper, Alumina and metallurgic coal, with iron near enough to equalling its record production number from Q1.

The company is also cheering the fact that capital and exploration CAPEX for FY14 is at US$16.1 billion and is well on track to hit expectations and has the possibility to come in under the forecasted figure if it continues its divestment program.

BHP has seen a 10% increase in portfolios production which is expected to hit 16% over the next two years. This on face value is a very typical BHP report – steady, reliable and well managed.

However there is a slightly feeling of disappointed once drilled down upon. As divisionally the softness is in areas of petroleum and iron ore will be seen as further indicators mining remains an area under slight constraints. 

Petroleum

Output for the quarter hit 57.7 million barrels of oil equivalent (Mmboe); the consensus estimates were for 59.9 Mmboe. That takes the half to 120.4 Mmboe, with guidance maintained at 250 Mmboe for FY14. This is slightly disappointing; the US operations for production increase of 72% however on the half production is off 1%, its off 4% on the quarter and 8% on the September quarter. The work needed over the next two quarters to reach company guidance will start to mount and leave no major room for seasonality and weather issues.

BHP have invested a lot of capital into this division (whether than be nominal or time) over the past five years and the contraction in this division will have management quietly vexed. 

Iron ore

Iron ore came in just short of an all-time record at 48.8 million tonnes (mt) which was just short of consensus estimates of 49.9mt. That is a 16% increase quarter-on-quarter taking the half year production figures to 97.82mt – a 19% jump half-on-half.

BHP’s WA iron ore (WAIO) hit a record production read at 108mt (100% basis) despite weather related down time this is a solid read and I believe should be commended. However most had hoped for an upgrade to guidance which has been maintained at 212mt (100% basis) for FY14 and compared to RIO’s results that were stellar, its iron ore division looks like it has come in second best.

Copper and met coal

In my opinion these two commodities are the stand outs of the numbers. Copper saw output hitting 439,000 tonnes versus a consensus estimate of 410,000 tonnes, taking the total for the half to 843,200 tonnes. That’s a 6% beat on the quarter, 6% on the half and 9% increase on the September numbers. BHP’s Latin American asset Escondida reached a production read of 564,000 tonnes and now make up 66% of total production. This is pleasing and I expect this asset to further increase over the coming quarters.

Met coal saw a further Queensland asset online taking quarterly production to 11.5 million tonnes with is a 30% increase quarter on quarter and 13% on the September quarter taking the half to a record production output to 21.7 million tonnes up 22% half-on-half with guidance maintained at 41 million tonnes. The company believes this is prudent due to the unpredictability of the wet season, which could lead to diminished number in the back half of the financial year.

The take outs

The report shows that BHP continues to evolve its diversified portfolio to offset external factors. The copper and met coal reads are pleasing, and with iron ore coming in at just shy of a record, and considering iron ore makes up 51% of EBIT, the report reads solidly. However the petroleum print is disappointing and will most likely be viewed as so, and considering it makes up 42% of EBIT may weigh on investors’ minds heading into its first half numbers. 

This result is a pass, but unlikely to sway the bears on the mining story, nor is there enough bad news to sway the bulls. All-in-all this is a report for a bet each way.

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