BHP Billiton reported strong fourth-quarter production with iron ore a highlight, sales volumes up 21%. The performance reflects successful commissioning of infrastructure for the Western Australian iron ore (WAIO) Iinner Harbour Expansion, and de-stocking of mine and port inventory. The result was considerably ahead of forecast and sees fiscal 2014 WAIO production guidance increased to 217 million tonnes (100% basis), from 200 million tonnes in fiscal 2013.
Despite this, iron ore is not all encompassing at BHP, like it is for Rio Tinto, and a weaker-than-expected fourth-quarter petroleum performance means our group fiscal 2013 earnings forecast is little changed at AUD 2.42 per share. Iron ore generated 55% of fiscal 2012 earnings before interest and taxes (EBIT). The fiscal 2014 earnings forecast is AUD 2.76 per share.
Fourth-quarter petroleum production grew 7% to 59.2 million barrels of oil equivalent, lower than anticipated, due chiefly to weaker-than-expected onshore U.S. production growth. Onshore U.S. oil, condensate, gas and gas liquids accounted for 43% of BHP’s petroleum output in the fourth quarter, up a lower-than-expected 5% on the third quarter.
Onshore U.S. production is predicted to near double during the next three years as additional wells are brought on line and infrastructure projects are completed. We make no change to our AUD 40 per share fair value estimate. On balance, production was largely in line and development projects remain largely on budget and schedule.
BHP has 18 major projects scheduled to deliver first production within two years. These, and a sharp focus on operating costs, underpin our forecast for ongoing earnings growth despite softening commodity prices. We remain positive on BHP overall and the shares are moderately undervalued. The market’s focus on the ups and downs of commodity prices and slower Chinese GDP growth misses the longer-term point.
Slower growth on an ever expanding pie still drives commodity volume growth. Also, as a low-cost producer, BHP is able to generate returns through the cycle while weaker competitors suffer. We maintain our narrow-moat rating on BHP. Assets represent a substantial proportion of the planet’s long-life, low-cost, export-oriented, expandable mines. BHP Billiton is putting the brakes on new capital expenditure and focusing on cutting operating costs and winning efficiencies.
The market will be watching the standard of delivery of remaining projects already underway. In a positive, the Daunia coking coal project achieved first production ahead of schedule and under budget and ramp up progresses ahead of plan. The catalyst for a rerating in BHP could be proof of declining capital expenditure as existing projects commission and less new projects begin. That dynamic raises the prospect of an increased dividend payout, a clear positive for the market.
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