Bhp: interim result 2020

BHP delivered yet another stonking interim result which included mountainous cash flow and its second largest dividend ever. 

All this in an environment where most commodity prices are modestly priced. Except, of course, iron ore, which remains elevated, impacted by supply disruptions in Brazil.

Results from iron ore were astounding. The division generated US$7.1bn in operating profit at nearly 70% margin. On an asset base of about US$22bn that represents a return on assets of over 60%. 

Key Points

• Another wonderful result
• Driven exclusively by iron ore
• Productivity gains appear exhausted

It's easy to see why this is such a remarkable asset. BHP controls its own rail and port infrastructure and can dig iron ore out at less than US$14 a tonne. It realised prices above US$78 a tonne for the period and its resources will last a century. 

From fair to great

Iron ore was alone in benefitting from higher prices. Most commodity prices were lower over the period, particularly LNG and metallurgical coal, which fell more than 20%.

While unit costs remain among the lowest in the industry, it is clear that the bumper efficiency gains and cost cuts of recent years have reached their limit. Efficiency gains were negligible this time and were offset by slightly lower output. This result was driven entirely by iron ore.

That should not diminish the achievement of BHP under the leadership of now departed Andrew Mackenzie. 

A focus on size and volumes has been replaced by a focus on returns and profitability. This is clear from presentations which now highlight returns on capital and a seemingly sacred treatment of BHP's new capital allocation model.

It is encouraging to hear new CEO, Mike Henry, reiterate that focus. It's clear the new boss doesn't want to dilute a wonderful collection of assets with growth for its own sake. He squashed suggestions that BHP would enter the lithium market and repeated that any new projects would have to compete for capital with BHP's existing mines. Good.

Almost perfect

Although BHP is in terrific shape - the balance sheet, unit costs and new projects all appear splendid - it isn't perfect. 

We've highlighted that Olympic Dam, BHP's giant South Australian mine, remains an unprofitable problem. 

A mine that is at once a significant producer of gold, copper, uranium and silver ought to be far more profitable than it is. Geological complexity is proving hard to crack and BHP has not settled on a development option to fix the mine. Spoilt by riches from other mines, BHP has time on its side so we don't expect a resolution soon.

BHP is keen to expand its output of copper and nickel but will likely need to find new assets to do so. It won't be long, we suspect, until the miner is back on the acquisition trail. This may unnerve some, but we think a dose of aggression in this area is sensible. 

BHP's nickel assets are of modest quality and meagre size. A large-scale nickel operation will require integrated mining, processing and logistics. This is something BHP knows a thing or two about and it could bring genuine value to acquired mines. After a long time being cautious and conservative, an aggressive turn is warranted here.

BHP is the kind of business that rewards inertia. We ought to sell it in outright booms, buy it in the bust and hold it through the cycle. Our record on the stock has been characterised by deliberate sloth. In that tradition, we continue. HOLD. 
 

Note: The Intelligent Investor Model Income portfolio owns shares in BHP as does the Intelligent Investor Equity Income fund.

Gaurav Sodhi is the Deputy Head of Research at Intelligent Investor. To access more share research from Intelligent Investor, start a 15-day free trial.