BHP Billiton (BHP.AU) (BHP) has delivered a solid fourth quarter production report, though the company’s guidance that its petroleum output will fall up to 13% will embolden critics demanding the business be divested.
The world’s largest mining company said iron ore production increased 8% year-on-year in the June quarter, while production of the steel making ingredient rose 4% to 231 million tonnes in the 2017 financial year. BHP Billiton forecast iron ore production of between 239 million tonnes and 243 million tonnes in the 2018 financial year.
Copper production fell 6% year-on-year due to the strike at its Escondida mine in Chile. BHP Billiton announced the strike had cost it $546 million before tax, or $367 million after tax. Full year production fell 16%, but the miner is forecasting an increase in production of between 25% and 35% in the 2018 financial year as Escondida ramps up.
Weakness in petroleum production will provide plenty of ammunition for a range of investors led by Elliott Associates who have called for the miner to divest the business. Petroleum production fell 7% year-on-year in the June quarter and fell 13% in the 2017 financial year to 208 million barrels of oil equivalent (BOE). BHP Billiton is forecasting production of between 180 million BOE and 190 million BOE, a fall of between 9% and 13%. The U.S. onshore business, which critics have zeroed in on, is forecast to deliver a drop in production of between 16% and 24% in the 2018 financial year.
RBC Capital Markets analyst Paul Hissey is one analyst who reckons the weak outlook for the the U.S. onshore business will attract investor attention:
The June quarter capped a solid end to what could be considered a weak FY17, notwithstanding the extreme circumstances in Chile (industrial action) and Queensland (Cyclone Debbie). Whilst the company expects a turnaround in its key copper unit (driven by Escondida), the weaker outlook for the US Onshore division (absent additional capital) in FY18 will likely be a focus of investor push-back. Lastly, unlike its major peer RIO, we would not expect the market to start anticipating additional capital returns from BHP.
Goldman Sachs said the production report was solid but doesn’t see much upside for the stock:
Overall a reasonable set of results for BHP. Production remains strong, cost reduction continues to occur and free cashflow generation is stable. Valuations are not stretched with BHP on 6.1x CY18e EBITDA (long term average 7.3x), but with our view that commodity prices are under pressure we see limited absolute upside in the shares from here.
Goldman Sachs rates the stock neutral with a price target of AUD22.50 a share.
BHP Billiton last traded down 1.8% at AUD24.64 a share.