Ord Minnett Research Recommendation: BHP Group
BHP Group conducted a tour of its iron ore operations.
On the first day of the event, management presentations at the Perth head office were hosted by Western Australia Iron Ore (WAIO) president Brandon Craig. There was a focus on BHP’s operational advantages, including lowest costs and capital expenditure, and highest achieved prices versus WA peers, as well as reliability.
Expectations of production growth to 300 million tonnes per annum (Mtpa), then 330Mtpa, remain beyond FY25–27, with utilisation of the infrastructure at the Yandi mine likely to represent the most capital-efficient pathway.
Costs remain well controlled, with the strip ratio of 1.3x steady in the near term and plans for a significant ramp-up of autonomous trucks. Decarbonisation remains a key focus, but there was no update on capital expenditure of potential operating expense savings, or the decarbonisation timeline (net-zero by 2050).
BHP’s steel briefing was more upbeat than expected, with the company expecting 1) China’s property sector to increase steel demand next year, 2) China to remain a 1.0–1.1bn-tonne producer in the near term, and 3) India and South East Asia to drive longer-term growth.
The second day involved a visit to the South Flank mine. The operation has reached 75% of its 80Mtpa capacity, with employee turnover a low 10% due to a positive culture and impressive female participation of 39%, double the industry average. We note labour is not a management concern despite widespread shortages across the industry.
The 330Mtpa scope for expansion (post FY27) looks conservative to us. WAIO will get to 300Mtpa of output without another car dumper, which will add about 60Mtpa of capacity in the longer term (that is, up to 360Mtpa). Achieving output of 330Mtpa won’t be cheap, however, and we estimate US$3bn, or US$100/t, in capital expenditure given the additional car dumper won’t be fully utilised.
Overall, we believe the business is well placed to maintain low costs with further automation and streamlining. We are yet to review our forecasts, but the probability of achieving 330Mtpa in the longer term appears high. We maintain our Hold recommendation on BHP with a $41.00 target price. The stock remains our preference versus Rio Tinto (RIO, Hold) and Fortescue Metals Group (FMG, Hold).
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.