Company Overview -
BHP Billiton Limited is a global resources company. The Company is engaged in exploration, development, production, processing and marketing of minerals, such as iron ore, metallurgical and energy coal, copper, aluminum, manganese, uranium, nickel, silver and potash. It is also engaged in exploration, development, production and marketing of conventional and unconventional oil and gas. The Company operates through segments: Petroleum and Potash, Copper, Iron Ore and Coal. The Company's Petroleum and Potash segment is engaged in exploration, development and production of oil and gas and potash pre-development. The Copper segment is engaged in mining of copper, silver, lead, zinc, molybdenum, uranium and gold. The Iron Ore segment is engaged in mining of iron ore. The Coal segment is engaged in mining of metallurgical coal and thermal (energy) coal.
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BHP Dividend Details
Mixed Sentiments with production results for the December 2015 half year and quarter: BHP Billiton Ltd (ASX: BHP) reported for productivity improvements at the back of solid production performance across its operated assets for the December 2015 half year. Underlying attributable profit in the December 2015 half year has been now expected to include additional charges of about US$300 million to US$450 million (owing to redundancies from simplification of business, rig terminations in Onshore US and closure of the Crinum coal mine, inventory write-downs, and global royalty and taxation matters). The company has nonetheless maintained full year production guidance for Petroleum, Copper and Coal. However, the company has reduced the total iron ore guidance by 10 Mt to 237 Mt at the back of the suspension of production at Samarco. Nonetheless, BHP reported a first-half iron-ore output to 118 million tons, which is a 4% year-on-year rise. On the other hand, BHP reiterated that guidance at Western Australia Iron Ore (WAIO) has been maintained at 270 M in view of productivity offsetting one-off operational issues from the December quarter. Major projects under development have been reported to be on track with The North West Shelf Greater Western Flank-A petroleum project completing under budget and ahead of schedule and The Greater Western Flank-B project being approved during the period. 268 kt of solid copper sales revalued at a weighted average price of US$2.14 per pound was reported at 31 December 2015. The company also intends to increase output from the conventional oil assets for a steady petroleum guidance.
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Production update and guidance (Source: Company Reports)
Impairment Charges on US Onshore Assets:
BHP recently reported that they estimate an impairment charge of over US$4.9 billion post-tax (or around US$7.2 billion pre-tax) as compared to the carrying value of its Onshore US assets. BHP expects to recognize this impairment charge during the half year ended on December 2015 on the back of volatile oil and gas prices, and consequently the group’s Onshore US net operating assets would reduce by over US$16 billion. Given the low US gas prices, the group and its peers have made efforts to enhance their productivity leading to a better than forecasted supply at lower cost. Accordingly, the group previously deferred development of its dry gas acreage. BHP is also decreasing the number of operated rigs in its Onshore US business to five during the March 2016 quarter as compared to seven rigs wherein three rigs are in the Black Hawk while two rigs are in the Permian. In fact, BHP reduced its operated rigs number in Onshore US business from 26 during the last year following the heavy fall in the oil prices. But, the oil prices plunged more than 30% (as of January 15, 2016 report) since the last three months on the back of disruption of OPEC as well as more than expected non-OPEC production. Therefore, management decreased its oil price assumptions for the short to medium term, even though the oil prices might improve from the current levels going forward.
Efforts to enhance cost efficiency across its assets:
BHP Billiton assets are among the low cost producers with strong margins, and the group is further making efforts to enhance its productivity gains as well as decrease costs to address the ongoing pressure in its performance. BHP delivered over US$3.2 billion of annualized productivity gains from fiscal year of 2012. Accordingly, the group targets to achieve a unit costs of US$1.08 per lb by fiscal year of 2017, which is a 34% decrease as compared to fiscal year of 2012. As per the Escondida highlights, the project’s three concentrator strategy would enable the project to survive its cost competitiveness in spite of grade decline and rising key input costs. The group achieved a decrease of 7% in unit costs to US $1.01/lb in FY15 for Escondida driven by supply optimization, labor productivity as well as operational enhancements. BHP expects to further decrease its Grade adjusted unit costs by 14% for fiscal year of 2016 and by 7% for fiscal year of 2017. With regards to the production highlights at Escondida, the group expects an average production capacity of over 1.2 Mtpa for a decade from fiscal year of 2016 and reiterated its guidance of 940 kt production in FY16. BHP expects a 15% production uplift during fiscal year of 2017, and has the ability to further increase its production in the coming years through less capital. The OGP1 concentrator at the Escondida project achieved a mechanical completion during May 2015, and estimates a total production during FY16. Escondida water supply project is also on track to be finished by 2017, while the group is seeking to prolong the life of Los Colorados to a minimum of FY17 year as well as increase the throughput to 375 ktpd as compared to an average of 220 ktpd in 2014 with very less capital.
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Cost competitiveness of BHP’s assets (Source: Company Reports)
Pampa Norte and Olympic Dam project highlights:
For the Pampa Norte project, BHP intends to decrease the unit costs at Spence by 10% to US$0.87/lb by fiscal year of 2017. The dry plant throughput is forecasted to rise by 20% to 56 ktpd by fiscal year of 2016. The Spence Recovery Optimization Project would support a tankhouse capacity of over 200 ktpa between FY16 and FY19, while the grades are estimated to be an average ~ 0.7% for the rest of the mine-life of supergene to mid-2020s. BHP is also seeking to enhance the cost competitiveness at Cerro Colorado by expecting a 10% cost reduction to US$1.91/lb in fiscal year of 2017 driven by rising throughput coupled with better contractor and labor productivity. Coming to the Olympic Dam highlights, BHP estimates a 48% decrease in unit costs to US$1.00/lb during fiscal year of 2017. The group forecasts that its Olympic Dam would support copper grades of more than 2.2% from FY21 and has the scope to achieve an average utilization of more than 220 ktpa capacity in the next decade.
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Production and unit cost estimations across BHP’s assets (Source: Company Reports)
Samarco Update:
Given the tragic event at BHP’s Samarco project, a 60-day satellite assessments update indicated that the volume of tailings material released during the dam breach was about 32 million cubic meters while over 85% of the released tailings were retained within 85 kilometers of the Fundão dam. As a result, the amount of tailings released were lower than the estimates of an excess of 50 million cubic meters. Moreover, the group undertook several measures at Samarco to stabilize the released tailings and prevent more material from entering the Rio Doce system, which includes the construction of dikes to contain tailings as well as revegetation along the Gualaxo and Doce rivers to decrease the risk of erosion in heavy rainfall. The repairing activities at Selinha dike which is above the Fundão dam at Germano complex were finished while Samarco reiterated the Santarém water dam that was overflowed had retained some of the tailings from Fundão.
Building long term pipeline:
BHP is building a long term pipeline by developing its current projects, explorations and other activities. The group intends to develop a 2.3 Bt hypogene resource at Spence while the project is currently under review by the board and BHP expects to start a production by fiscal year of 2020 with a cost estimate of below US$2.2 billion. The project has the potential to generate an incremental copper capacity of over 200 ktpa during the initial ten years, while favorable copper and molybdenum grades would drive the cost position. Meanwhile, BHP is also expanding its Olympic Dam Underground to improve the ore hoisted to ~20 Mtpa via an added shaft. This project would have a scope to generate over 450 ktpa of total copper production since 2025. On the other side, BHP is also pursuing exploration option to enhance its copper options as a part of its strategy. BHP’s Copper business generated strong performance, and contributed over 23% and 24% to the overall Group’s production and Underlying EBIT in FY15. Despite the short term pressure for copper on the back of China slowdown, long term prospects look attractive for copper. Therefore, BHP released a Greenfield exploration budget of over US$65 million during FY16 and is aiming Tier 1 discoveries in the Americas. However, BHP has been cautious in its drilling expenditure since FY13 and achieved more than 70% decrease in its operational costs. On the other side, the group’s North West Shelf (NWS) joint venture Project got approval for the Greater Western Flank Phase 2 (GWF-2) Project at the north-west coast of Australia with Woodside Energy Ltd being the Operator (with 16.67% stake). The GWF-2 Project would develop 1.6 trillion cubic feet of raw gas (2P 100% project basis) from the joint Keast, Dockrell, Sculptor, Rankin, Lady Nora and Pemberton fields using subsea infrastructure and a 35 km, 16” pipeline linking to the current Goodwyn A platform. Overall investment for the project is forecasted to be over US$2.0 billion.
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Copper assets promising strong copper production for long term (Source: Company Reports)
Stock Performance:
The shares of BHP plunged 45.42% in the last six months (as of January 19, 2016) impacted by the ongoing decline in Oil and gas prices. Moreover, the recent impairment charges in its US Onshore Assets posed further pressure in the stock performance. However, recent operational updates do indicate mixed sentiments. BHP’s focus on copper projects, ongoing productivity as well as cost improvements coupled with solid long term prospects would add support to the stock in the coming periods. Any recovery in the oil prices from these levels would also drive the stock further in the coming months. Moreover, BHP has an outstanding dividend yield. The heavy correction in the stock offers attractive entry opportunity for investors seeking for value bargain opportunities, and we reiterate our “BUY” recommendation on the stock at the current price of $14.21
BHP Daily Chart (Source: Thomson Reuters)
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