Coal spoils steady BHP Production
Share Cafe reported that BHP is forecasting stronger operating performance in the second half of 2017-18 after turning in what could be described a solid effort in the three and six months to December, except in its key coking coal business in Queensland where production is down, costs certain to rise which could impact earnings.
The world’s biggest miner reported that it was maintaining its full year production and unit cost guidance for Petroleum, Copper, Iron Ore and Energy Coal.
At Western Australia Iron Ore, a record annualised production rate of 284 million tonnes (on 100% basis) was achieved for the December 2017 quarter.
Investors didn’t like the report and sent the shares down 2.5% to USD 30.78 - that took the two day fall to more than 5.3%.
But BHP revealed problems in its Queensland coking coal business had forced it to cut production guidance to between 41 and 43 million tonnes for the year to June 30.
BHP blamed that ”challenging roof conditions at (the) Broadmeadow (mine), which are expected to continue through the March 2018 quarter, and geotechnical issues triggered by wet weather impacts at (its) Blackwater operation.”
BHP warned that “Unit cost guidance is also expected to be negatively impacted and is currently under review,” which is another way of saying profitability from the coking coal business will take a hit in the interim and full year reports.
BHP also warned that underlying earnings before interest and tax in the December 2017 half year “is expected to include impairment charges, predominately related to conveyors at the Escondida copper mine in Chile, in a range of USD 250 million to USD 350 million.”
But that will be offset by the positive move in copper prices on provisional pricing - "The provisional pricing and finalisation adjustments will increase Underlying EBITDA by USD 246 million in the December 2017 half year,” BHP said in yesterday’s report.
BHP CEO, Mr Andrew Mackenzie, said that “A strong operating performance in the first half allowed us to capture the benefit of higher prices. The successful Los Colorados Extension project ramp-up contributed to a 17 per cent increase in copper output and production records were achieved at a number of Western Australia Iron Ore and Queensland Coal mines. "We have revised down our metallurgical coal production forecast for the full year as a result of geotechnical issues at both Broadmeadow and Blackwater.”
BHP had forecast coking coal output for 2017-18 at 44 and 46 Mt (against 40 million for 2016-17, thanks to the impact of Cyclone Debbie). Now that has been cut to the range of 41 to 43 million tonnes. The positive is that is still higher than 2016-17 total.
Mr McKenzie said that "The momentum we’ve built across the wider portfolio during the second quarter will flow through to an expected stronger second half operating performance. Together with incremental production from latent capacity projects in iron ore and copper, we expect volume growth of six per cent for the full year.”
BHP said in commentary that "As at the date of this Operational Review, we are not in a position to provide an update, for the purpose of the December 2017 half year financial results, on the ongoing potential financial impacts on BHP Billiton Brasil of the Samarco dam failure. Any financial impacts will continue to be classified as an exceptional item.
"On 22 December 2017, the US President signed a new US tax law (H.R. 1). BHP is currently working through the financial impacts of the tax reform, which will include a non-cash revaluation of the Group’s US net deferred tax assets. The financial impact is expected to give rise to an exceptional item in the December 2017 half year financial results. Longer term, we expect US attributable profits to be positively impacted by the lower US corporate income tax rate.”
Both the situation in Brazil and the financial costs of Samarco and the final impact of the US tax changes will make for some ‘rubbery’ half year and 12 month profit estimates for BHP from analysts leading up to the release the interim report in a month’s time.
Looking at the company’s major businesses, BHP said its metallurgical coal production for the December 2017 half year fell 4% to 20 million tonnes (Mt). "Guidance for the 2018 financial year has been reduced to between 41 and 43 Mt and reflects lower volumes now expected at Broadmeadow and Blackwater. As a result of the reduced Broadmeadow and Blackwater volumes and compensatory increased production from higher cost pits, unit cost guidance is also expected to be negatively impacted and is currently under review,” the company said.
"Total iron ore production for the December 2017 half year was in line with the same period last year at 117 Mt, or 136 Mt on a 100 per cent basis.
"Guidance for the 2018 financial year remains unchanged at between 239 and 243 Mt, or between 275 and 280 Mt on a 100 per cent basis, with volumes weighted to the second half of the financial year as expected.
"At WAIO, record production at Jimblebar and Mining Area C was offset by the impact of lower opening stockpile levels following the fire at the Mt Whaleback screening plant in June 2017, and planned maintenance in the previous quarter.
"Volumes increased by 11 per cent from the September 2017 quarter with a record annualised rate of 284 Mt (100 per cent basis) achieved for the December 2017 quarter. The higher volumes reflect increased plant availability and improved rail performance.
BHP said that "Port debottlenecking activities were completed in the December 2017 quarter and will support higher volumes in the second half of the financial year.”
Its total copper production for the December 2017 half year increased by 17% to 833,000 tonnes and guidance for the 2018 financial year remains unchanged at between 1.655 million and 1.790 million tonnes.