20th Jul 2016 11:27
LONDON (Alliance News) - BHP Billiton PLC said production of almost all of the company's major commodities fell during the last financial year and warned of further declines in most areas this current year as it continues to focus on improving productivity and costs rather than ramping up volumes.
BHP shares were trading down 2.9% to 920.60 pence per share on Wednesday afternoon, the third worst performer on the FTSE 100 behind peers Anglo American PLC and Glencore PLC.
The FTSE 100-listed multi-commodity giant reported year-on-year falls in production of petroleum, copper, iron ore and thermal coal as only one commodity, metallurgical coal, experienced a tiny rise.
Even though BHP lowered its production guidance for iron ore during the year following the Samarco dam burst in Brazil back in November, the company failed to mine enough to hit its revised target and thermal coal production also fell short due to unfavourable weather.
Petroleum and copper production may have been lower year-on-year but both commodities came in slightly ahead of guidance. The fact BHP also produced more metallurgical coal during the year than planned suggests the small year-on-year lift was not necessarily expected.
The guidance for this financial year, which started this month and will end in June 2017, is also mixed. Further and steeper falls in petroleum and thermal coal production are anticipated this year whilst only small rises are expected within the copper, iron ore and metallurgical coal units.
BHP also warned that underlying profit and underlying earnings before interest and tax will both be hit by up to USD175.0 million worth of additional charges in the second half of the financial year that ended last month.
Whilst the company expects to reverse some of the write-downs it has previously booked against its inventory due to commodity prices, the gains will be wiped out by charges booked in relation to the redundancies that were made to simplify the business and impairments that have been booked primarily against the coal business.
Commodity prices, as expected, were lower across the entire portfolio in the year and by a significant amount. The smallest price decline was 17% whilst the largest decline was 43%.
In addition, BHP said a further USD150.0 to USD200.0 million exceptional charge will be booked in the second half to address "global taxation matters", including "potential litigation and tax-related amounts".
BHP's iron ore unit was marred during the last financial year by the burst tailings dam that killed numerous people in Brazil and forced the Samarco operation, which is a 50:50 joint venture with Vale SA, to shutdown, costing the London-listed company around 14.5 million tonnes of annual production.
BHP had to lower its guidance for the year as a result, dropping its target to 237.0 million tonnes from the original 247.0 million tonne goal - but the company still failed to deliver. The miner did manage to increase iron ore production at its Australian operations to new record highs but it was not enough to offset the lost production in Brazil.
Total iron ore production was 2.0% lower in the year to 227.0 million tonnes, 4.2% lower than the revised guidance and over 8.0% below the original guidance at the start of the year.
This year, BHP expects iron ore production to either remain flat or rise by up to 4.0% and, importantly, the guidance excludes the suspended Samarco operation.
Iron ore production this year will total between 228.0 to 237.0 million tonnes, meaning the potential lift is only being anticipated because BHP failed to deliver its target in the recently-ended financial year.
Petroleum production fell 6.0% during the year to 240.0 million barrels of oil equivalent after deferring development activity at its shale operations in the US, but that was still slightly ahead of guidance. However, BHP is expecting production to fall at an even steeper rate this year.
BHP has guided production this year will be in the region of 200.0 to 210.0 million barrels - a 13% to 17% decline.
Copper production in the year was down 8.0% to 1.6 million tonnes as improved throughput and a better operating performance from the Escondida mine in Chile was offset by lower grades. The unit is, however, expected to report the largest production rise this year as BHP has forecast a 5.0% rise to 1.7 million tonnes.
Metallurgical coal, used in the steel-making process, was the only commodity to experience a rise in production during the year after the 43.0 million tonnes extracted beat guidance and caused a 1.0% year-on-year increase, suggesting the rise was not necessarily expected by BHP.
Production was up following record production at five mines in Queensland, Australia, partly offset by the cessation of production at Crinum, and production should continue to rise this year after BHP set a target to produce 44.0 million tonnes, which would be equal to a 3.0% lift if delivered.
Thermal coal, on the other hand, reported a 16% year-on-year drop in production to 34.0 million tonnes due to "unfavourable weather", "operational rescheduling" and because of divestments. Production this year will decline further, by around 7.0%, with a target of 32.0 million tonnes.
All of BHP's average commodity prices fell in the year and will exacerbate the lower level of production, and the declines are significant. Oil prices were down 43%, copper prices fell 23%, iron ore by 30% and coal prices fell in a region of 17% to 21%.
"Over the next 12 months, we expect volumes and costs across our minerals businesses to benefit from our continued drive to safely improve productivity. We can create significant value through further cost reductions, taking advantage of latent capacity in our assets and investing in low-capital projects," said Chief Executive Andrew MacKenzie.
Although there are some bright spots in the guidance for this year, BHP is ultimately aiming to bring costs down at a faster rate than production, improving productivity and therefore the profitability of its operations.
BHP provided a limited update regarding the suspended Samarco operations in Brazil, but has said it is not yet in a position to estimate the potential financial impacts of the incident - which could run into the tens of billions of dollars.
BHP vowed only earlier this month to fight against attempts being made by Brazilian Courts and prosecutors to overturn the financial settlement that was agreed earlier this year. The original settlement, which looks in doubt, was only for GBP1.70 billion to GBP2.70 billion but if the courts are successful then that will be thrown out and replaced with a considerably larger, GBP4.68 billion charge.
By Joshua Warner; [email protected]; @JoshAlliance
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