BHP Second-Quarter Production Sizzles

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BHP reported impressive second-quarter production, with most commodities up strongly on both the September and previous corresponding quarters. In many cases, in percentage terms, output growth was double-digit, or better. Compared to the September quarter, sales volumes rose 10% for iron ore, 23% for copper, 20% for coking coal and 13% for aluminium – all above expectations.

Strong increases are notable for being in some of the highestmargin businesses. The major exception was liquid hydrocarbons, up just 4%, and below expectations. Nickel and diamonds also fell short, but are no longer major divisional earners for BHP. In fact, the diamond division has been sold, subject to regulatory approval. Strong liquids numbers from the U.S., including onshore shale, Shenzi development drilling, and full quarter contributions from Atlantis and Mad Dog, were crimped by field decline and seasonal factors from Australian operations.

On U.S. shale specifically, quarterly liquids output grew a pleasing 13%, to a record 2.7 million barrels. Focused drilling in the liquidsrich Eagle Ford and Permian shales is expected to drive further production growth in fiscal 2013. Following Rio Tinto’s RIO recent USD 14 billion write-down of aluminium and coal assets, many fear BHP will follow suit. We think overall write-backs are more likely with U.S. shale assets performing well, and USD 3.40/mmBtu Henry Hub gas prices well above April’s sub USD 2.00/mmBtu lows.

BHP said, “Release of latent capacity at a number of our highest margin businesses and strong growth across our broader portfolio is expected to deliver compound annual growth of 10% in copper equivalent terms over the two years to the end of the 2014 financial year.” The recently installed fifth car dumper at Western Australian Iron Ore (WAIO) received first ore during the December quarter. It is the last major piece of infrastructure required to deliver system capacity of 220 million tonnes per annum (Mtpa) versus the December quarter’s 188Mtpa run rate.

Fiscal 2013 WAIO production guidance remains unchanged at a 5% increase to 183 million tonnes (100% basis). The copper division was a stand-out with sales volumes at the Escondida mine in Chile jumping 40% for the quarter to 135,000 tonnes. Sales volumes for the copper division overall increased 23% to 322,000 tonnes. Higher head grades and throughput from Chilean operations were only partially offset by weaker production from Olympic Dam in South Australia, where a smelter outage is planned to persist into the March quarter.

Coking coal volumes benefited from a 30% jump in Queensland coal production following conclusion of a workforce enterprise agreement and draw-downs from inventory. At the end of December Queensland coking coal operations were approaching full capacity, BHP saying, “The associated increase in productivity, broader economies of scale and closure of high cost capacity is expected to deliver a substantial reduction in unit costs in second half of the fiscal 2013 financial year.” This, and news that the company’s 20 development projects across oil and minerals remain largely on schedule and budget, is heartening.

 

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