Bulk Buys: BHP places chips on iron ore, met coal as it waves goodbye to petroleum in Woodside deal
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BHP (ASX:BHP) has taken advantage of 2021’s astonishing boom in iron ore prices to shower shareholders with a record dividend and kickstart the transformation of the world’s biggest mining house.
Its final payout of US$2 per share came off the back of some of the best conditions for iron ore and as BHP and CEO Mike Henry went nuclear with plans to redesign its asset base and identity off the back of three major decisions.
The first was the confirmation of the $20 billion deal to merge its petroleum assets with Woodside (ASX:WPL) via the distribution of the Perth-based oil and gas producer’s shares to BHP shareholders to create a world’s top-10 energy company.
The second was the announcement that BHP would invest US$5.7 billion to build the grand scale Jansen Potash Mine in Saskatchewan, Canada, which will open in 2027, take seven years to pay back and be operating for a century.
The third was the call to scrap its dual listing in London, picked up in its turn-of-the-century merger with Billiton, and unify under the ASX-listed BHP banner.
The Woodside deal is expected to close in the second quarter of 2022, and will make iron ore an even more substantial part of the mining house it already dominates.
BHP met analyst expectations to deliver underlying earnings of US$37.4 billion, up from US$22.1 billion in 2020, with a near doubling in underlying profit to US$17 billion and attributable profit of US$11.3 billion.
That was up from US$8 billion despite booking an exceptional US$5.8b loss on payments related to the Samarco dam disaster and impairments on its energy coal assets.
Its stake in the Cerrejon mine in Colombia was sold to Glencore last month with a competitive process ongoing for its Australian thermal coal assets.
“We have a clear strategy and are executing against it,” BHP chair Ken MacKenzie said.
“Jansen Stage 1 will give BHP exposure to a commodity with a strong demand outlook and decades of potential growth.
“The agreement to pursue a merger of BHP’s Petroleum business with Woodside will maximise the value of our oil and gas assets through increased operating scale and synergies, with a more diversified product portfolio to support the energy transition.
“Now is the right time to unify BHP’s corporate structure.”
In revealing the new direction of the 120-year-old mining giant, BHP has shoehorned iron ore to the list of commodities that will feed into the green energy thematic.
The company noted its role in infrastructure “including for renewable energy”.
“Following our investment in Jansen S1, the proposed separation of Petroleum and exit of our non-core coal assets, BHP will be focussed on high quality iron ore and metallurgical coal for the steel that is needed for infrastructure including for renewable energy; copper to support unprecedented demand for renewable energy; nickel for batteries; and potash to make food production and land use more efficient,” BHP said in its financial results statement.
“We have progressed exploration and development in copper and nickel, commodities which are favourably leveraged to the mega-trends of electrification and decarbonisation,” CEO Mike Henry said.
“In sanctioning the Jansen Stage 1 project in Canada, we gain access not only to the healthy returns of this project on a stand-alone basis, but to a new front for growth in a future facing commodity in the world’s best potash basin and an attractive investment jurisdiction.
“The merger of our petroleum business with Woodside will create a top 10 global independent energy company, unlocking value for BHP shareholders, including through synergies, and a stronger, more resilient combined business that will be better positioned to continue to grow value as it navigates the energy transition.”
Chairman Ken MacKenzie hinted acquisitions may be on the horizon for BHP as well, just weeks on from its successful bid for nickel explorer Noront Resources.
Iron ore is an inseparable business for BHP. It delivered US$26.3b of BHP’s US$37.4b EBITDA in 2021 at company high margins of 77%.
The only other sector that seriously registered was copper, which like iron ore climbed to record high price levels during the June Quarter and raked in EBITDA of US$8.5b.
However met coal, which delivered just $553 million in EBITDA, could be a money spinner this year with prices for premium hard coking coal skyrocketing in recent weeks to hit US$222.35/t as Chinese supply crunches filter through to other Asian markets BHP’s Australian mines are selling to.
Whether BHP will see the US$200/t plus iron ore levels that powered the record result remains to be seen, as the promise of steel production cuts in China and continued expectations of supply increases in the coming years weigh on analysts’ predictions.
Iron ore was up US$1.45/t on Monday to US$163.52/t according to Fastmarkets as dramatic price falls seen in recent weeks moderated.
The most traded Dalian futures contract for January delivery continued to trend down yesterday.
Recent Chinese economic data disappointed over the weekend, while the return of Covid lockdowns in the country where the virus originated could also have a dampening effect on the powerhouse economy.
China’s steel output fell 8.4% year on year in July, and while that is a clear slowdown, it also means China needs to reduce output even more in the coming months having seen crude steel production rise almost 12% year on year in the six months to June 30.
“We think policymakers will eventually relax steel output restrictions when steel prices increase because the steel output cuts are more severe than any slowdown in China’s steel demand,” Commbank analyst Vivek Dhar said.
“However, such a policy change is only likely once COVID‑19 restrictions are relaxed.
“And that could be soon given the number of new infections of local transmission in China has fallen over the past week.
“Higher steel and other commodity prices have already irked policymakers because of the concern that it may translate through to higher inflation.”
In its results BHP said medium term demand for iron ore would be lower than today due to plateauing steel production and increased scrap use in China.
“The premium for lump product has been very favourable in the most recent half, buoyed by similar factors to fines, in addition to sintering restrictions in parts of China,” the company said.
“Medium term, China’s demand for iron ore is expected to be lower than it is today as crude steel production plateaus and the scrap-to-steel ratio rises.
“In the long-term, prices are expected to be determined by high cost production, on a value-in-use adjusted basis, from Australia or Brazil.”
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The big focus this week has been BHP, but there was some activity at the junior end of the market this week.
GWR Group (ASX:GWR) was up yesterday after announcing haulage rates from the C4 iron ore mine at its Wiluna West project overshot July forecasts of 120,000t.
After hauling 125,060t to the port of Geraldton in July, GWR is on track to ramp up to 130,000t in August.
GWR has waved off two 56,400wmt and 58,955wmt shipments of lump iron ore to Hong Kong based offtaker Pacific Minerals this month, with up to four ships due to be loaded this month.
With prices down from recent record highs, GWR chairman Gary Lyons said the company’s focus is on reducing its $120/t C1 cash costs.
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Earlier this month, Bowen Coal (ASX:BCB) inked a deal to buy 90% of the Lenton JV in NSW, which includes the mothballed ‘Burton’ mine and associated infrastructure, plus the high-quality ‘New Lenton’ development project.
These coal assets have a replacement value of ~$300m.
Bowen will pay vendor New Hope Corp (ASX:NHC) $20m upfront (of which $10m can be cash or scrip at Bowen’s election) plus potential milestone and royalty payments up to the maximum value of $77.5m.
This delivers on Bowen’s strategy to be the “next leading independent ASX coal producer” – targeting production of approximately 5mtpa by 2024.
$140m-capped Bowen is up almost 80% over the past month.