Monsters of Rock: Is M&A or consolidation BHP’s next step?
Link copied to
It doesn’t take long to work out the enlarged BHP (ASX:BHP), which announced its first earnings as a single unified company on Tuesday, is in very strong financial health.
The Big Australian has dropped net debt from ~US$12 billion to ~US$4 billion in a year as price runs in every commodity it mines from iron ore to coal to copper and nickel helped the company to a US$10.7b underlying profit in the six months to December 31.
The mining giant has readjusted its net debt target from US$12-17b to US$5-15b, signalling a focus of capital discipline at the same time it goes in search for a big fish acquisition target.
RBC Capital Markets analyst Tyler Broda says BHP boss Mike Henry — who said on a conference call yesterday organic growth and investments in early stage explorers were other avenues for growth — faces competing priorities investing in returns to shareholders and M&A.
“The new net debt target of $5-$15bn should drive continued cash returns, but value-added M&A could take priority,” he said in a note.
“BHP has changed its net debt target to $5-$15bn from previous $12-17bn to match a smaller asset profile at the top end after Petroleum spin and to provide more flexibility at the bottom end.
“Management has suggested that the top end could be breached if there were to be a value accretive opportunity.
“We think there will likely be a mix of both continued dividends and M&A as the transformation of BHP for the
21st century continues.”
RBC maintained a sector perform rating and $46 price target on BHP, but Broda says it is still a key pick for the Australian market.
“This suggests that most of the total return for investors will come from dividends, which we expect will help support the shares as key commodities iron ore and met coal see prices retrace,” he said.
“Larger scale M&A adds a potential question mark, but we think BHP with its long-term outlook can still potentially find value, especially if it used its shares as currency.”
Major miners have been gun shy in recent years about investing in major capex and M&A after a series of mega projects and investments in the mining, oil and gas sectors which failed to deliver during the mad days of the early 2000s mining investment boom.
BHP’s own chief analyst Huw McKay said as much in an economic outlook released by the big miner with its results yesterday.
“Moving to the global canvas, if we narrow the discussion to the capex outlays of the top 80 listed miners, as tracked by Standard & Poor’s, investment in calendar 2022 is expected to reach 69% of the super cycle peak of $130 billion (calendar 2012),” he said.
“However, projected capex for 2024 (analyst consensus) is lower than 2022, at 54% of peak.
“Diversified miners are investing a little more than others, proportionally, but there is no sign of an investment breakout on any score.
“The capital discipline the industry has demonstrated in the last half decade or so remains steadfast on this evidence.
“Even specialist copper miners, facing fly–up pricing, a very attractive longer term outlook and a supportive shareholder community, are projected to reduce outlays to just half of super cycle levels in 2024, 16% lower than in 2022.”
How long this capital discipline continues in a time of high prices and strong inflation remains to be seen.
Henry noted BHP exercised this “capital discipline” when it decided not to match Andrew Forrest’s Wyloo Metals’ bid for Canadian nickel co. Noront.
Its sense of corporate adventure could also be balanced by its capital commitments towards decarbonisation.
A major industrial emitter, BHP says capex over the next decade on decarbonisation will be at the upper end of its guidance range of US$2-4 billion, but as green commitments from businesses and governments continue to gather pace companies may face pressure to ratchet those investments higher.
It’s been a couple years since Canada’s First Quantum revived for a third time the Lazarus-like Ravensthorpe nickel operations in WA, which have collapsed before under both FQM and BHP’s watch.
Stronger nickel pricing amid EV demand encouraged FQM to reopen the mine and develop the new Shoemaker-Levy orebody.
But it has still proved a tough, loss making slog despite general exuberance in the nickel space.
Ravey is a large, long life nickel laterite mine which delivers a mixed hydroxide using high pressure acid leach processing.
That expensive process, made tougher to manage by high sulphur and shipping costs as well as labour shortages in WA, saw the mine operate at a US$61 million loss in 2021 despite rising nickel prices.
But the mine did get a US$240 million investment last year from South Korea’s POSCO for a 30% stake, and FQM projects brighter times to come.
It plans to ramp up production from 16,818t of nickel metal in 2021 (12,695t in 2020) to 25,000-30,000tpa between 2022 and 2024.
All in sustaining costs are expected to decline over that time from US$7.00 – $7.75/lb to US$6.75-7.25/lb, down from US$11.15/lb in the December quarter when Ravensthorpe was heavily impacted by unplanned maintenance which saw it produce just 3,385t of nickel metal, the worst performing quarter of the year.
Nickel is fetching more than US$10.50/lb, so Ravensthorpe should be making money.
Given its cost base FQM and POSCO will be joining those hoping green demand will send nickel prices flying in the not too distant future.