Coal Spoils Steady BHP Production
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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 Thursday 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 (WAIO), 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 $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 ”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.”
“Unit cost guidance is also expected to be negatively impacted and is currently under review,” BHP warned, 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 US$250 million to US$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 US$246 million in the December 2017 half year,” BHP said in yesterday’s report.
BHP CEO, Andrew Mackenzie, said in yesterday’s : “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.
"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,” CEO McKenzie said.
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.
"Port debottlenecking activities were completed in the December 2017 quarter and will support higher volumes in the second half of the financial year,” BHP said.
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.
“Escondida copper production for the December 2017 half year increased by 29 per cent to 583,000 tonnes, supported by the start-up of the Los Colorados Extension (LCE) project on 10 September 2017.
"LCE successfully ramped up during the December 2017 quarter, enabling utilisation of the three concentrators. Production guidance for the 2018 financial year remains unchanged at between 1.130 and 1.230 million tonnes,” according to BHP.
Olympic Dam copper production for the December 2017 half fell 31% to 54,000 tonnes (as expected) "as a result of the planned major smelter maintenance campaign recently completed. Smelting operations have now resumed with the first anode cast from the flash furnace on 23 December 2017.”
"Operations will continue to ramp-up to full capacity in the March 2018 quarter, with production guidance unchanged at 150 kt for the 2018 financial year. We expect production to increase to approximately 215 kt in the 2019 financial year, underpinned by improved operating performance and higher ore grades from the Southern Mine Area,” BHP said in the report.
The company said total petroleum production for the December 2017 half year fell 7% to 99 million barrels of oil equivalent (MMboe).”Guidance for the 2018 financial year remains unchanged at between 180 and 190 MMboe, comprising Conventional volumes between 119 and 123 MMboe and Onshore US volumes between 61 and 67 MMboe,” BHP said.
"Petroleum capital expenditure of approximately US$1.9 billion is now planned in the 2018 financial year, a reduction from our previous guidance of US$2.0 billion. Onshore US capital expenditure is expected to be lower at US$1.1 billion, reflecting development activity tailored to support value in the exit process and meet Hold by Production obligations.
"Conventional capital expenditure of US$0.8 billion remains unchanged, focused on high- return infill drilling opportunities in the Gulf of Mexico, a life extension project at North West Shelf and investment in the Mad Dog Phase 2 project,“ BHP explained.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.