Monsters of Rock: Where will BHP land as earnings D-Day approaches?

The BHP share price to be closely watched as it stalks OZ Minerals
The resources giant is expected to deliver FY22 US$20.4bn profit: City Index
Shanghai Metals Markets: growing demand & supply issues could lift short-term iron ore prices

The world’s biggest miner BHP (ASX:BHP) is never far from the action and has turned itself back into the centre of attention this week with its $8.4 billion bid for copper and gold miner OZ Minerals (ASX:OZL).

Also on the horizon for the Big Australian though is its full year earnings next week, which should provide an insight into where it thinks the global economy is headed, its approach to shareholder returns in a weakening commodity market and whether OZ is just the tip of the iceberg in its return to corporate raids after a decade long hiatus.

Goldman Sachs reckons BHP will begin to taper its payouts, especially after Rio Tinto (ASX:RIO) got earnings season off on a bearish note at the end of July by slashing its payout and ditching its special dividend amid lower iron ore prices.

The direction of BHP’s share price is also of concern, both for its OZ Minerals bid and general holders.

The company’s shares are down 1.1% today to while OZ’s (though down 1.7% today) remain above the $25 price its board rejected a few days ago. That indicates OZ’s shareholders see a higher bid coming from BHP or elsewhere.

BHP meanwhile may not be getting the kudos it hoped from investors for its efforts to take out OZ’s nickel and copper assets.

City Index market analyst Tony Sycamore expects BHP to deliver an underlying net profit of US$20.4 billion, up 19.3% for the full year.

But its share price has wavered since its April double top of $47.90, with Sycamore saying a break of support at the $40 and $39 levels could leave it vulnerable to a return to July lows of $35.85.

Commodity prices, supply costs a headwind

Sycamore says since April commodity prices have slumped. Iron ore in particular is off 35% and accounts for the vast bulk of BHP’s earnings (it clocked a US$9.7b profit in the first half).

“For the first half of the year, BHP announced an underlying profit of US$9.7 billion and a $US1.50 per share interim dividend. The bumper result came from surging prices and demand for its key commodities, including iron ore, copper, coal, and nickel,” he said.

“However, since April, commodity prices have slumped, including a 35% fall in the price of iron ore, and similar for copper. Zinc prices have halved, as have coking coal prices.

“On the other side of the ledger, the company faces higher costs from supply chain constraints and a tight labour market, compounded by the deepening woes in China’s real estate sector.

“The mixed outlook for commodities has already seen rival mining heavyweight Rio Tinto disappoint investors this earnings season as it declared a smaller dividend than expected and no special dividend at all.”

BHP will report its earnings at 8.30am AEST on Tuesday.

Opinions are mixed from analysts on the direction of iron ore prices, currently trading around US$110/t.

Some are bearish based on the outlook for the Chinese economy.

Shanghai Metals Market analysts on the other hand, think prices are likely to rise in the short-term on stronger profits at steel mills and falling supply from Australia and Brazil, with came off 12.1% last week.

“In general, the steel mills will stay cautious and maintain a balance between the production and sales in the short term due to the concerns about the sustainability of finished product sales,” they said.

“At the same time, the profits of steel mills have rebounded, but whether the profits will sustain remains in doubt amid rising coke prices and iron ore prices.

“In conclusion, the demand is growing slowly as steel mills resume the production, and the overseas shipments have declined. It is expected that iron ore prices are likely to rise in the short term.”