In a similar vein to Rio Tinto, BHP retains fiscal year 2013 production guidance, despite sharply lower third-quarter sales volumes. Compared to 2012’s fourth quarter, petroleum volume fell 7%, iron ore 8%, copper 16%, coking coal 10% and thermal coal was down 6%. Rare bright spots were aluminium, steady, and nickel up 23%, though these are both low-margin commodities. Cyclone-related downtime hit iron ore, and heavy rains impacted Queensland coal. Despite the declines, most segments performed better than expected, considering the poor weather.
Petroleum production guidance stands at 240 million barrels of oil equivalent (mmboe) with a 15% jump in onshore U.S. liquids production offsetting cyclone downtime in WA. Group production in 2012 was 217mmboe. West Australian iron ore production guidance is similarly unchanged at 183 million metric tons on a 100% basis, with the annualised rate approaching 200 million metric tons in the June quarter. Annualised production was just 175 million metric tons in the June 2012 quarter. Third-quarter copper production was impacted by weaker output from the Antamina mine in Peru with a temporary reduction in grade. Escondida remains on track to increase production by 20% in fiscal 2013 courtesy of higher grades. Escondida represents over half of all BHP copper production.
BHP remains significantly undervalued with the quarterly result unlikely to move our earnings forecasts or the fair value estimate meaningfully. BHP retains its narrow-moat rating, low-cost production and world-class growth potential at the core. Compared to Rio Tinto, we prefer BHP’s more balanced asset portfolio including petroleum, with onshore shale gas is likely to enjoy strengthening U.S. gas prices. These have pushed through the USD 4 per thousand cubic foot (/mcf) mark compared to sub USD 2 lows plumbed in April last year. Analysts long term U.S. gas price forecast is USD 5.40/mcf, the level on average necessary to make drilling new wells viable. BHP’s costs are significantly below industry average.
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