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BHP Group share price reacts to move in iron ore, but interim results impress

BHP results for the interim period were good, although earnings dependence on iron ore keeps outlook uncertain.

Source: Bloomberg

The BHP Group has released interim results for the 6 months ending December 2021 (1H21).

A summary of which is as follows (1H21 vs 1H20):

  • Revenue +27%

  • Profit before tax +61%

  • Underlying profit +57%

  • Return on Capital Employed 39%

  • Interim dividend of $1.50 ($1.01 in prior years interim period)

Comments on results

BHP has produced a strong set of results with the largest contributor to earnings being iron ore (60% of Earnings Before Interest Tax Depreciation and Amortisation or EBITDA). Near record production levels at Western Australian Iron Ore (WAIO) helped contribute to a 50% increase in before tax profits from the division. Copper and coal, saw record prices realised over the six months to further support EBITDA. Strong earnings, improved cash flow and a reduction in net debt has shareholders being rewarded through a record interim dividend offering (nearly 50% higher than prior year’s comparative).

Iron ore remains the key commodity for the group. In the company’s full year outlook, guidance has suggested that headwinds in China (the group’s largest export destination) are starting to abate. However, the outlook for iron remains uncertain as noted by Chinese authority’s interjection through production limits, emission controls and more recently closer price scrutiny.

Broker recommendations (Australian listing)

Source: Refinitiv

As of the 15th of February 2022, a Refinitiv consensus of 15 broker recommendations suggests that BHP Limited sits somewhere between a hold and buy. However, the consensus also suggests that the share sits close to fair value currently with the long-term price target only 2% higher the last traded price.

BHP Limited (SA listing) – Technical view

Source: IG Charts

The share price of BHP has come under since the release of results, although the move lower could be more in lieu of a sharp fall in the price of iron ore after Chinese authorities suggested closer scrutiny on pricing.

The longer-term trend remains up, although we are seeing a short-term correction of this trend right now. The corrections see a confluence of support at 49820 as its initial target. Should this level not hold, 47660 becomes a further downside target from the move. 47660 is a key level as it marks a major low. If this level is broken, we would consider the longer-term uptrend to be broken as well.

However, these levels have not yet been broken and the trend bias remains up despite the near-term correction. For long entry, traders will want to see a bullish price reversal before one of the aforementioned support levels. In this scenario traders could target a retest of the high at 54000, whilst using a close below the reversal low as a stop loss consideration for the trade.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa 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.

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