BHP’s double whammy: Escondida strike and iron ore dive could throttle Big Australian’s earnings

Goldman Sachs analysts say Escondida strike could hit BHP bottom line for US$240m in the second half of CY2024
The last major strike by the Sindicato No. 1 union in 2017 lasted 44 days, but costs are expected to be far higher in 2024
Copper strike and iron ore price drop have Big Australian at year low

Experts say BHP (ASX:BHP) could be on the hook for US$240 million in lost earnings and forgo 50,000t of copper production if a strike at the world’s largest copper mine extends to 10 days.

Employees represented by one of the two unions representing full-time workers at the Escondida mine in Chile walked off the job in recent days as they press for up to US$36,000 per worker in bonuses.

It’s the latest in a process that tends to happen twice each decade, according to Goldman Sachs analysts led by Matt Greene.

“BHP successfully negotiated terms with Sindicato No.2 at Escondida (1k supervisors and staff) in Oct’23 and Spence in Jun‘24 (1.1k operators); and these terms can often set expectations for other unions to follow,” the bank’s analysts said in a note.

“However, Sindicato No.1 have a history of industrial action every ~6yrs at Escondida, with strikes in 2006 (25 days), 2011 (15 days), and 2017 (44 days).

“Negotiating an improvement on the existing contract could cost c.$110mn in cash bonuses assuming the reported $36k bonus and 3% wage increase; it would add USc8/lb to our 2H’24e Escondida unit costs.

“A 10-day strike scenario could cost ~$90mn in fixed/idling costs, but ramping down/up the mine would likely add a further 5-7 days of effective lost production, removing ~50kt of copper production, impacting 2H’24 EBITDA by ~$240mn at $4/lb copper on our estimates.”

Terms in the post

BHP had until Monday to avoid a strike, with Syndicato 2 workers downing tools yesterday after Chilean Government mediation failed to reach an agreement.

Goldman’s analysts say bonuses tend to lob in at around 20-30% below the union’s demands once negotiations are done and dusted, though workers rejected an offer of US$28,900 an employee on Monday and Tuesday.

The ordeal highlights the challenges facing the Chilean copper industry’s major players, with a number of large mines facing agreement renewals in 2024.

“As we flagged in April, a number of labour unions at operations representing ~65% of 2024 Chilean copper output (GSe 3.6Mt of 5.6Mt) were entering typical 3yr wage negotiations this year; and with the dynamics facing the Chilean copper mining industry, including inflationary pressure/cost of living, higher copper prices and a tight skilled labour pool, we believe there is heightened risk of industrial action,” GS said.

Escondida, majority owned and managed by BHP but also held 30% by Rio Tinto (ASX:RIO) and 12.5% by Japan’s Jeco Corp, last issued bonuses of US$26,600/worker in 2021.

But GS’ analysts note the largest bonus in recent history was paid at the Los Pelambres mine owned by Antofagasta (US$27,000 in 2022), while State-owned Codelco paid out US$5,300 a worker at Salvador in 2022 and US$15,000 a worker at Zaldivar in 2023.

At an average of US$7600 a month, Escondida’s labour force is paid more than double the average salary of mine workers in Chile, something that means it has far higher fixed costs.

Those are tempered by the scale of the mine, which BHP expects to produce 1.08-1.18Mt in FY25, around 5% of global mined copper production.

Iron ore hit for BHP

BHP is keen to ramp up its copper earnings to further diversify its portfolio, which has been heavily reliant on iron ore and, to some extent, metallurgical coal.

Along with potash, copper is its favoured ‘future facing commodity’ over lithium and nickel, an option on the electrification thematic sweeping the mining industry.

BHP recently punted over $3bn on the acquisition of half of the Filo Del Sol and Josemaria copper development projects in Argentina, having failed in its attempt to ensnare Anglo American, the owner of high quality copper mine stakes in Peru and Chile.

But a 2.77% drop yesterday had $201 billion capped BHP shares at a 12 month low, down 11.5% over the past year.

The Escondida strike is one factor, but far more worrying will be a 2.8% drop in Singapore iron ore futures to US$95.80/t.

The run was surprising since iron ore has regularly rebounded off its floor after dropping below US$100/t in recent months.

But crummy Chinese steel PMI readings for July have the market in a sour mood, with MySteel reporting price cuts from steelmakers and lower premiums on high grade products as Chinese steel mills eat losses.

Shagang Group, a private steelmaker, has cut prices three times in a row since mid-July, MySteel says.

BHP has regularly said the replacement of Vale’s product after a deadly Brazilian tailings dam collapse in early 2019 by marginal operators has pushed cost support up to between US$80-100/t.

But miners have been stripping back layers of middle management in recent months to preserve margins, with Fortescue (ASX:FMG) and Mineral Resources (ASX:MIN) among those to announce white collar job cuts.