BHP share price: interim profits rise, iron ore to remain ‘volatile’

We examine the key things we learnt from BHP's FY20 interim results.

Interim results

BHP Group (ASX: BHP) today released its first-half, FY20 results. Here, the miner reported a rise in profits, strong cashflows and a continued focus on capital discipline. The company also revealed that it would pay a US$0.65 interim dividend.

The market responded to today’s results with lacklustre enthusiasm: bidding the stock just 0.26% higher in the first hour of trade, to $38.60 per share.

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Reflecting on these results, BHP's CEO, Mike Henry said:

'BHP is in good shape. We have passionate and committed people hungry to perform. We have brought together high quality assets in a simple portfolio that allows us to create value at scale. Our balance sheet is strong and we have embedded a capital Allocation Framework which drives discipline and better decisions.'

BHP share price: fundamentals in focus

Centrally, the miner recorded earnings (underlying EBITDA) of US$12.1 billion (+15%) against attributable profits of US$4.9 billion (+29%).

This increase in profitability was attributed to rising iron ore prices, operational stability, and beneficial exchange rate fluctuations.

At the same time, the miner did note that those benefits, and the impacts they had on profits from operations were 'partially offset by lower volumes (planned maintenance, petroleum natural field decline and copper grade decline), inflation and increased deferred stripping related costs.'

The price of iron ore

Looking at BHP's iron ore arm – arguably the company's most important – the miner revealed an earnings (EBITDA) increase of US$2.8 billion during the half, bringing the company's total underlying EBITDA to US$7.1 billion.

Though BHP Group remains less reliant on iron ore than the likes of Fortescue or Rio Tinto – on underlying H1 earnings of US$12.1 billion, ~60% of the Group’s earnings remain tied to iron ore.

Indeed, given its importance, the company today provided commentary on the iron ore outlook, with BHP positing that supply conditions will likely normalise over the next one to two year period. In the interim however:

‘Prices are likely to be volatile as that adjustment plays out. High cost production, on a value-in-use adjusted basis, from Australia or Brazil is expected to determine market price in the longer term. Quality differentiation will remain a durable element iron ore price formation,’ it was also noted.

Looking at other concerns, BHP cites policy uncertainty, demand uncertainty, and mixed sentiment as key aspects of the broader market outlook. Mid-term fundamentals however remain 'attractive'.

All up, the BHP share price now trades just ~4% higher than it did one year ago.

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