BHP Flags Risks for Near-Term; Annual Profit Down by 4 Per Cent

Summary

• BHP released its annual figures, reporting a decline of 4 per cent in profit for FY2020.
• A late rally in copper and oil prices instigating a slight recovery in the midst of June 2020 quarter has taken a toll on the annual profit for such miners.
• BHP estimated total impact from COVID-19 on operations of USD 348 million on a pre-tax basis, including an exceptional charge of USD 183 million in FY2020.

Commodity market has been on a rollercoaster ride since the beginning of the year 2020; however, the rush in many commodities such as iron ore to record highs along with a decent recovery in oil and base metals has supported the financial strength of multi-commodity miners such as BHP Group Limited (ASX:BHP).

Meanwhile, a late rally in copper and oil prices instigating a slight recovery in the midst of June 2020 quarter has taken a toll on the annual profit for such miners.

Also Read: Iron Ore Exporters and Stock Price Race: FMG, BHP, RIO

BHP Releases FY2020 Figures

BHP has released its annual figures for the financial year ended 30 June 2020 (FY2020), reporting revenue from continuing operations of USD 42,931 million, down by 3 per cent against the previous year.

• Total revenue for the period declined slightly by 5 per cent to stand at USD 42,931 million with a Net Profit After Tax (or NPAT) of USD 7,956, down 4 per cent against the previous year.
• Attributable profit for the period reached USD 8.0 billion while underlying attributable profit stood at USD 9.1 billion; both remaining in line with the prior year.
• Profit from operations was USD 14.4 billion while underlying EBITDA reached USD 22.1 billion at a margin of 53 per cent.
• BHP reduced unit costs of production by 9 per cent during the period across major assets, generating a net operating cash flow of USD 15.7 billion - representing the fourth consecutive year of net operating cash above USD 15.0 billion.
• FCF or free cash flow for the period stood at USD 8.1 billion with full-year dividend of USD 1.20 per share.

Earnings and Margins Attributes and Time Series Performance

Attributable profit of USD 8.0 billion includes an exceptional loss of USD 1.1 billion concerning the impairment of Cerro Colorado, a provision for cancellation of power contracts as part of a shift towards 100 per cent renewable energy at Escondida and Spence, costs related to COVID-19 and the impact of Samarco dam failure.

• Furthermore, attributable profit for the period remained in line with USD 8.3 billion registered by the Company in FY2019.
• Likewise, underlying attributable profit of USD 9.1 billion remained unchanged against the prior year.

Additionally, BHP suggested that a ~ 10.55 per cent decline in profit from operations at USD 14.4 billion was primarily driven by lower prices, lower volumes - (including copper grade and petroleum field declines) and increased deferred stripping depletion at the Escondida copper mine.

• However, it was partially offset by the favourable impacts of exchange rate movements, better productivity, record production at WAIO, Caval Ridge, and Poitre, and lower unit costs across all major operations.
• Underlying EBITDA declined by ~ 5 per cent at USD 22.1 billion, which as per the Company, was partially indemnified by record volumes across multiple assets, improved operating stability, and favourable impacts from exchange rate movements and the application of IFRS 16 Leases.

BHP also estimated and suggested that the total impact from COVID-19 on operations stood at USD 348 million on a pre-tax basis, including an exceptional charge of USD 183 million in FY2020.

BHP’s Economic and Commodity Outlook

The Company flagged the risk of secondary wave of infections, globally, and suggested that except China, major economies would contract in 2020 while the outlook for 2021 remains uncertain.

• However, under multiple scenario projections considered, BHP selected the base case to be a solid rebound in the global economy during the year and suggested that there would be considerable variation at the country level.
• Moreover, the Company mentioned that under the base case, global economy would be 6 per cent smaller than it would otherwise have been in the year 2021.
• Furthermore, China and other OECD nations are anticipated to return to the pre-crisis trend growth rates from around 2023 while developing economies outside East Asia might take longer.
• Despite flagging some short-term risk on global economic recovery over uncertain future and risk of a second wave of infection, the Company is optimistic over global economic growth front in the long-run with population growth and rising living standards expected to fill in the demand for energy, metals and fertilisers ahead.

On the commodity front, the Company suggested that for the current year, a range of risks for the price of various commodities prevail.

• On top of the chain is the potential for re–emergence of COVID–19 outbreaks in key markets or supply jurisdictions of the Company.
• Furthermore, BHP estimates that global crude steel production would decline in 2020 with solid growth in China offset by a steep fall across the global front.
• Moreover, the Company projects global crude steel production to decline by 6 per cent and pig iron production to plunge by 3-4 per cent.
• Additionally, BHP suggested that the preliminary assessment for 2021 is for a percentage increase of similar magnitude to the 2020 contraction, with pig iron lagging somewhat behind.

For its main commodity, i.e., iron ore, BHP anticipates that a recovery in the Brazilian supply chain would bring price ease, and in second half of the year 2020, iron ore demand from China would be lower against the first half.

To Know More, Do Read: Iron Ore Prices Poised to Weather the Supply Normalcy Storm?

In a nutshell, while the Company has somewhat weathered the storm of COVID-19 impact on its majority of commodity prices due to a rush in iron ore prices, BHP anticipates that the near-term future for commodity and economic recovery on the global front remains uncertain. However, the miner is optimistic over the demand for commodities in long run, as global economy moves towards gradual recovery.

Despite a challenging financial year, the Company has somewhat managed a strong financial position. However, on a time-series basis, the performance for FY2020 has taken a hit as compared to the prior year. As the Company suggested many uncertain risks are yet present in the market, it would be worth witnessing how miners would sail across these uncharted waters.

On 19 August 2020 (AEST 01:33 PM), BHP stock was trading at $39.170, down by 1.211 per cent from its previous close.