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BHP (ASX: BHP) has long been regarded as a mining powerhouse capable of weathering various challenges, from adverse weather conditions to legal disputes. However, recent developments suggest that even BHP may face significant hurdles.
On Thursday, BHP announced two 'exceptional items' to be included in its half-year FY24 results. Firstly, it will recognize a non-cash post-tax impairment charge of approximately US$2.5 billion against the carrying value of Western Australia Nickel. This impairment reduces the carrying value of net operating assets to -US$300 million, with the assets expected to contribute a negative underlying EBITDA of -US$200 million in the first-half results. Secondly, BHP will recognize an income statement charge of US$3.2 billion post-tax in relation to the Samarco dam failure, bringing the provision for the dam failure to US$6.5 billion as of 31 December 2023.
For context, BHP's 2023 annual report reported US$3.7 billion in provisions for the Samarco dam failure, marking a significant 75.7% increase in the updated provision.
The assets impacted by the impairment include Nickel West and West Musgrave, with Nickel West's net operating assets now valued at -US$300 million, inclusive of mine closure and rehab provisions.
Morgan Stanley analysts have highlighted concerns over increased provisions and potential cash outflows required for Samarco, leading them to maintain an Equal-weight rating on BHP. The recent provisions account for potential settlement or damages payments related to legal proceedings initiated by Brazilian authorities following the dam failure.
Last month, BHP received formal notification from Brazilian judges to pay 47.6 billion reals (US$9.7 billion) in damages, part of a broader claim filed in 2016 for 155 billion reals (US$31.5 billion) for collective moral damages.
The payment schedule for these provisions remains unclear, posing uncertainty over BHP's net debt and dividend payouts. Analysts at Morgan Stanley forecast a net debt of US$12.7 billion for the first half of FY24, compared to BHP's target range of US$5-15 billion.
In summary, BHP's recent announcements indicate significant challenges ahead, with its nickel assets devalued and the provision for dam disaster-related fines continuing to escalate. The uncertainty surrounding potential cash outflows and their impact on growth and dividends has led some analysts to prefer Rio Tinto over BHP.
