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4:04 am
Jul 17, 2013
Asia

BHP Digs Deeper Even as Demand Slows

By Robb M. Stewart
Timing, as the saying goes, is everything.

For the world’s third-biggest iron ore miner, BHP Billiton, reaching record production levels just as demand for industrial commodities in Asia is slowing isn’t ideal.

Still, BHP shares have risen about 10% in the past week as investors bet the economies of scale at play in the mining company’s vast operations, which span from the iron rich red soils of Australia’s Pilbara region to South Africa and Peru, will help it ride out steep falls in commodity prices.

Iron ore production rose 7% to 169.9 million metric tons in the financial year through June, BHP said Wednesday. The increased output comes as prices for the steelmaking commodity—which accounts for more than half of BHP’s annual earnings—have fallen more than 10% so far this year.

Prices for thermal coal, used in power generation, and metallurgical coal, also used to make steel, have fallen 17% and 19%, respectively, during the same period, according to RBC Capital Markets.

Despite a dimming outlook for industrial commodities as China’s economy slows, BHP shares rose as much as 2.4% in Sydney Wednesday to a one-month high of 34.32 Australian dollars (US$31.65) a share. They remain about 8% lower than at the start of the year. But there are signs new Chief Executive Andrew Mackenzie—who took the reins in May—could be living up to his promise to work assets harder as he works to trim spending and costs.

“We believe this result highlights BHP’s current focus on increasing asset productivity is beginning to deliver meaningful results,” Goldman Sachs GS -1.69% analysts said in a note, adding that it was a “solid result” with production beating forecasts across key commodities.

Even news of another multimillion dollar cost overrun from the expansion of a major mining project in the Pilbara—where miners have been hit hard by rising labor costs and a strong Australian dollar—didn’t deter investors.

“Overall, this was a slightly stronger quarter than we were expecting, with the strong iron ore and metallurgical coal performances more than offsetting the weaker petroleum production,” Macquarie analysts said in a note. “The outlook for 2014 looks good with strong iron ore guidance,” they added.

Macquarie kept an outperform rating on the stock and a price target of 39 Australian dollars a share.

BHP plans to raise output from its Pilbara operations further to 207 million tons this year, but the extra supply will come on to the market at a time when rivals like Rio Tinto and Fortescue Metals Group FMG.AU +6.00% are also expanding mines or bringing new pits into operation. Shares in Rio, which reported record second-quarter production Tuesday, have fallen 14% this year, while Fortescue is down 20%.

More supply is likely to weigh on spot prices, especially if Chinese demand weakens further. RBC predicts the average price of iron ore will fall to $110 a ton next year and $100 a ton in 2015, compared with $127 a ton this year.

Still, adding to the overall bullish view Deutsche Bank DBK.XE +0.22% analysts said Wednesday BHP’s strong June quarter would likely lead analysts to upgrade their consensus forecasts

http://blogs.wsj.com/moneybeat/2013/07/17/bhp-digs-deeper-even-as-demand-slows/