5 key takeaways from BHP's half-year result

BHP's (ASX: BHP) first-half result might contain a bit of shock value after statutory profits tumbled 86% in the first half to US$927 million – The lowest since February 2016.

Encouragingly, the sharp profit reflects well-documented impairments to its Australian nickel assets as well as higher provisions relating to its 2015 Samarco dam disaster. At the underlying level, half-year profits were unchanged year-on-year at US$6.6 billion.

In this wire, we'll recap some of the takeaways from BHP's half-year result, which provides a key look-through into Australia's mining industry and the global economy.

#1 Earnings miss, dividend beat

Statutory items aside, earnings metrics like revenue, EBITDA and net profit missed analyst expectations by 1-5%. Despite the weaker bottom-line, it managed to declare a stronger-than-expected interim dividend.

• Revenue +6% to US$27.2 billion, below the US$27.1 billion consensus
• Adjusted EBITDA +5% to US$13.9 billion, below the US$14.0 billion consensus
• Underlying earnings per share -0.5% to US$1.29, below the US$1.31 consensus
• Dividend per share of 72 US cents, above the 70 US cents consensus

#2 The economy, commodity demand and costs

Economic conditions to improve: "In the near term, the economic outlook for the developed world is expected to improve modestly after a difficult year for both steel and non-ferrous metals demand in CY23. China and India are expected to remain relative sources of stability for commodity demand ... We anticipate that a more balanced global economy and evidence that the worst of the general inflationary wave is behind us, will have a positive impact on our industry in CY24."

Commodity demand remains firm: "The demand for commodities in the developed world has been soft over the last 12 months due to anti-inflationary policies and the lagged impacts of the energy crisis. We believe that the lag effect of higher interest rates will continue to restrain household consumption in the developed world in the first half of CY24, but we expect that steel, copper and nickel demand will all be modestly firmer across OECD countries in the coming 12 months. We also forecast another solid year for commodity demand in China, while India has considerable positive momentum behind it."

Lagged effect of inflation: "Pressures in non-energy raw materials, logistics and manufacturing supply chains and energy risks have continued to ease, but labour costs remain a key forward-looking inflationary risk."

My favourite line: "Overall, the cost of mining production continues to be higher than it was prior to the pandemic. This implies that price support is also expected to be higher than in previous cycles and low-cost operators stand to capture potentially higher relative margins in certain commodities."

#3 Copper's time in the sun

Copper has not seen major new supply for a number of years and high-cost producers have been struggling to turn a profit at prices below US$4/lb.

"We anticipate that the cost curve is likely to steepen as challenges to the development of new resources (such as societal expectations, decarbonisation and water challenges) progressively increase," BHP said in its half-year report.

The copper market is forecast to enter the final third of this decade with a low inventory buffer, which suggests that if deficits arise, prices could rise significantly above the cost curve during this period.

#4 Iron ore strength

BHP's average realised iron ore price in the first-half was US$103.7 a tonne, up 21% year-on-year.

"China posted record iron ore consumption and near-record blast furnace utilisation rates in CY23, while India continued to exhibit rapid growth in steel production," noted the report.

"Over the next two years we expect a small further improvement in global steel production with growth led by India, Southeast Asia and to a lesser extent China."

#5 The pain points

An additional US$3.2 billion was added to BHP's provision for the Samarco dam failure, bringing to total to US$6.5 billion as at 31 December 2023.

"We are Equal-weight BHP due to risks around increased provisions (and eventually cash out required for Samarco)," Morgan Stanley analysts said in a note dated 14 February.

"The payment schedule of the provisions is not yet clear and will determine the impact on net debt and hence BHP’s ability to undertake counter-cyclical inorganic growth or payout dividends."

BHP's Western Australia Nickel business posted a $0.2 billion loss due to "significantly lower realised prices for nickel" as well as elevated cost inflation.

The path of least resistance for nickel continues to be a painful one, with BHP acknowledging that "the industry is expected to experience a difficult multi-year run as excess current and committed supply is gradually absorbed by rising demand."

The path forward for Western Australia Nickel may include reducing discretionary expenditure, reviewing capital plans and possibly entering a period of care and maintenance at Nickel West.

• Read the Announcement – Half Yearly Report and Accounts

• View the Presentation – HY2024 Results Presentation

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