BHP smashing records

The release of BHP’s first quarter numbers shows one thing very clearly; CEO Andrew Mackenzie’s focus on increased asset productivity is providing definitive results.

The key theme of quarterly numbers is the ’Mackenzie’ effect on petroleum. The 62.7 million barrels of oil equivalent (Mmboe) was ahead of expectations and a record print for the company. Shale liquids (LNG and crudes) saw a 16% jump which significantly underpinned the numbers in petrol as the Black Hawk (formally Petrohawk) assets finally tick over.

It is one area that Mackenzie has been targeting since taking the helm in March, and with petroleum registering an EBIT of 41% at last call there is no doubt he will want the division to gap up on iron ore over the years.

However iron ore itself was a standout, at a touch under 49 million tonnes for the quarter (a record number), and BHP has been able to upgrade its fiscal year guidance to 212 million tonnes on a 100% basis (192 million tonnes on a share basis).

With iron ore averaging US$135.1 speculation will grow as to the value extraction and the effect on the bottom line come the February first half numbers.

This statement from Mackenzie perfectly encapsulates the results from the iron ore: “Our pursuit of productivity gains and operating excellence is already yielding strong results; there is no better example than in our iron ore business”.

The statements mean BHP sees the China story continuing even though the company forecasts the country’s GDP at 6% in FY15 and 16. The confidence in the division from management will please and excite investors and will drive investment.

The Rest

I need to allude to the rest of the reported numbers, particularly copper and thermal coal. Copper output of 403,000 kilotons was soft as flows from Olympic Dam impacted production, however the impact is believed to immaterial with fiscal guidance maintained as the company turns more attention to Escondida.

Thermal Coal remains in decline and the recent sell off of assets in the Hunter valley as well as Queensland are expect to see thermal shrinking further into the further however at 19.6 million tonnes the figure suggest BHP is looking for stabilisation in this area.

Coking coal (metallurgic) was also soft at 10.2 million tonnes and was flagged at its recent update as scheduled maintenance at Riversdale and wall movements at Crinum and West Clift hit the figures.

However these divisions combined equate to less than 20% of EBIT, with copper taking up a fair chunk of remaining earnings. I see the results in coal as fairly immaterial and with petroleum becoming the second pillar and potash the fifth pillar in the years to come the copper result would be of most concern.

However I do see the ramp up of Escondida offsetting the issue at Olympic Dam and will see copper holding the third pillar of BHP’s strategy and will pick up as the US and European home demand picks up.

Technicals

BHP has traded in band now for over two years, it finds very strong support below $32 and particularly around $30.50 with strong resistance at 39.50 and $39.89 which is the 50% retracement of the 2011 high to the 2012 low.

Since the questioning of the China story and the ‘death of the mining boom’ BHP has been stuck in this band.

However, I see these results translating into material longer term numbers. I see a trade opportunity in the short term of buying the stock to be stopped out at resistance on expectations of a pullback.

Come December with two months to BHP’s first half numbers a retest of the $39.50 resistance should occur and may see BHP finally breaking out and head to the next level of $42.21.

BHP share price

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.