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BHP likely to up production, price in earnings announcement

Buoyed by demand for iron ore and positive sentiment from a big dividend last quarter the BHP share price looks attractive, but the road ahead may be bumpy with impact from supply chain squeezes and the Russia Ukraine conflict. 

Mining giant BHP [BHP] is expected to report an upgrade in full-year iron ore production guidance when it issues its nine-month (to 31 March) operational review on 21 April.

According to analysts at UBS, BHP is expected to report a 3% jump in its year-on-year, March quarter, Western Australia Iron Ore output to approximately 68 million tonnes. This gives it the potential, UBS adds, to lift its full-year guidance to the top end of its 278Mt–288Mt range.

“We mitigated the impacts of COVID-19 and significant adverse weather events to turn in a solid operational performance, particularly from our flagship Western Australian Iron Ore business,” said CEO Mike Henry at its half-year presentation in February.

Demand for iron ore to make steel has lifted as economies continue their recovery from the pandemic. That includes China, where demand had slowed since the real estate market came to its knees as property giant Evergrande [3333.HK] nearly defaulted on loan payments and the government’s zero-Covid policy.

Upticks in demand and production in other sectors such as copper – helped by mines powering up to full capacity post-Covid – and nickel will also boost BHP’s performance. The metals are key components in electric vehicle batteries and battery storage, part of the green tech revolution.

Headwinds ahead

Like many others, the global supply chain squeeze is also seen affecting BHP.

The Ukraine/Russia conflict has had an impact on commodity markets as Ukrainian ports remain shut and Russia, the world’s fifth largest global steelmaker, faces trade sanctions.

Moreover, BHP is unlikely to give an update on its petroleum numbers. It had held back on the details even in its half-year results. The completion of the proposed merger of its petroleum business with Woodside [WPL.AX] isn’t expected to close till the June 2022 quarter.

Price hikes

Russia’s invasion of Ukraine sent commodity prices soaring off the back of the imbalance in demand and supply. Demand has been driven by governments and businesses looking to ramp-up exposure to green and renewable energy as they seek greater security and independence from Russia. This is helping copper and nickel prices.

The demand for steel and iron ore is also set to increase due to the Chinese government’s decision to fast-track several major infrastructure projects to boost its ailing economy.

According to Trading Economics, the price of iron ore is up 50% since the end of November last year, with copper up 12%. The BHP share price has benefited, rising 30% since the start of 2022 to around $78.

Alluring investors like and ‘indulgent grandparent’

In its full-year results ended 30 June 2021, BHP recorded an attributable profit of $11.3bn, up 41% on the same period in 2020. It benefited from higher sales prices across its major commodities, near-record production in Western Australia and favourable exchange rate movements. It was impacted, however, by Covid-19 costs, higher fuel and energy prices, and wet weather.

It also announced a record interim dividend of US$1.50 per share or $7.6bn. “Mining heavyweight BHP does not seem too worried about inflation,” said AJ Bell financial analyst Danni Hewson.

“Soaring commodity prices are helping it rack up big profits and dole out rewards to shareholders like an indulgent grandparent handing out sweets to a favourite grandchild.”

Still, investors search for more

According to CNN, the 23 analysts offering 12-month price forecasts for BHP have a median target of $73.58, with a high estimate of $90.44 and a low estimate of $55.48. The current consensus is a ‘hold’ rating.

Perhaps investors are waiting for something more from the group. “BHP [has been] linked in recent months with a tilt for [fellow miner] Glencore as it takes advantage of its simplified structure to pursue major acquisitions,” said Hewson. “Whether Glencore’s continuing interest in coal would act as a poison pill to any deal though is an open question. BHP has turned away from the polluting fossil fuel, even selling one of its coal assets to Glencore in 2021.”

Investment advisor Liberum is more positive on BHP as it recently upgraded the stock to ‘hold’ from ‘sell’, reports The Fly .

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