3 interesting takeaways from BHP’s full-year results

BHP (ASX: BHP) reported its FY23 results earlier this month, with 37% drop in profits to US$13.4 billion due to ‘significantly lower prices across iron ore, metallurgical coal and copper.’

But beyond the numbers, what were some interesting takeaways that we can learn from one of the world’s largest miners?

#1 India: An emerging powerhouse

“In the near term, China’s trajectory is contingent on the effectiveness of recent policy measures. We expect buoyant growth in India with strong construction activity underpinning an expansion in steelmaking capacity,” said BHP CEO Mike Henry.

India is emerging as a bright spot that could help offset China's worsening economic outlook.

India’s economic growth is forecast to rise 7.7% year-on-year in the June quarter, the fastest annual pace in a year thanks to strong demand and growing government capital expenditure, a Reuters poll found.

To add some perspective, India consumed approximately 11% of global iron ore supply or 1.1 billion tonnes in 2021.

For a broad recap about India as an investment opportunity (and some options), check out Chris Conway’s wire: ‘Where in the world should you invest – India’.

#2 Nickel: It's a tough business

BHP’s nickel production rose 4% to approximately 80,000 tonnes in FY23 while average prices rose 3% to US$24,021 a tonne.

If production and average prices ticked upwards, then earnings should also inch higher right?

Far from it – underlying nickel earnings fell 61% year-on-year to US$164 million due to:

• Inventory drawdowns to support the supply chain
• WA-cost inflation including increased labour costs, higher input costs (consumables, diesel, ammonia and explosives)
• Lower realised prices for intermediate products

And that’s at a US$24,000 a tonne nickel price. What would its earnings profile look like if prices were, say, US$20,000 a tonne?

BHP reiterated its bullish long term outlook for nickel, saying “we believe nickel will be a core beneficiary of the electrification mega-trend and that nickel sulphides will be particularly attractive.”

But at least for now, things have been rather painful for most listed nickel plays, including:

• IGO (ASX: IGO) slashed the value of its WSA acquisition by $880-980m reflecting “we believe nickel will be a core beneficiary of the electrification mega-trend and that nickel sulphides will be particularly attractive.”

• Poseidon Nickel (ASX: POS) deferred the restart of its Black Swan Nickel Project due to “project related factors together with the continuing tightness in the WA labour market … and the increased volatility in global commodity and equity markets.”

• Panoramic Resources (ASX: PAN) raised $40 million at a 45.7% discount as “recent operational setbacks has triggered the need for new funding and the restructure of our debt facility.”

If margins are tumbling for a name like BHP, IGO is slashing the value of its nickel acquisition by around 75% and developers are struggling to come online, then what does that tell us about nickel markets?

• As BHP warns “Indonesian supply continued to grow apace at a time of slowing economic growth.”
• Is there a price floor if major players like BHP are struggling to turn a profit?
• Do prices need to be higher to support new supply? At least in the medium-to-long term?

#3 More growth CAPEX, less dividends

BHP guided to US$10 billion in capital and exploration expenditure for FY24 and approximately US$11 billion per annum in the medium term.

Macquarie says these figures “forecasts largely match the guidance with differences representing some projects (incl West Musgrave, copper growth studies, etc) that are currently not in our base case.”

“As the group pivots to growth, we expect lower payout ratio in the short to medium term, with a payout ratio of ~63% for FY24,” and roughly the same in FY25.

This compares to previous payout ratios of:

• FY22: 77%
• FY21: 89%
• FY20: 74%

We’re seeing a similar thematic play out for peers such as Fortescue (ASX: FMG) and its ongoing investments in FMG Energy (formerly Fortescue Future Industries) as well as Rio Tinto (ASX: RIO) and its big bets on lithium and copper.

This article was first published for Market Index on Tuesday, 29 August 2023.