Morgans Financial Limited

While BHP remains one of our preferred exposures to the resources sector, we believe the strength of the recovery in coal and iron ore prices has carried the big miner’s share price into fair value territory. With coal prices already moderating, we expect an end to the upward move in spot iron ore prices could yield a fresh opportunity for investors to add to positions. With a revised valuation-derived price target we maintain our Hold recommendation. The key risk is commodity prices.

Strong first half

BHP posted a robust 1H17 result, with underlying NPAT of US$3.24bn (vs Morgans US$3.14bn) and underlying EBITDA of US$9.9bn (vs Morgans US$9.7bn).

The exceptional result, ahead of our estimates (and consensus), was carried by BHP's raw material divisions where the big miner capitalised on higher coal and iron ore prices to boost its cash flow performance.

Meanwhile BHP’s petroleum and copper divisions came in modestly below our estimates. With higher margin divisions outperforming, BHP posted FCF of US$12bn, over three times as much FCF as a year ago.

Prioritising balance sheet (for now)

Harnessing much of its cash flow performance to strengthen its balance sheet, BHP paid out US$748m in an interim dividend of US40cps, while building its cash reserves by US$3.67bn (lowering net debt to US$20.1bn).

With some of its key metals trading at levels above BHP’s forecast long-term (sustainable) forecast, and the current global macro uncertainty, BHP decided to hold fire on rolling out larger shareholder returns this half.

However, BHP made it clear that increased dividends and potential share buybacks were a near-term answer for capital deployment should metal prices stay elevated.

Samarco further away than assumed

In the result BHP commented that while a restart of Samarco during CY17 was technically possible, it was unlikely given BHP still needed to form an agreement with Vale (to use some of Vale’s open pits to store tailings), followed by a raft of approvals needed to restart the operation, while Samarco itself needed to reach an agreement with its banks and bondholders to restructure its debt.

We had assumed Samarco would come back online after 18 months, but have now pushed this back to mid CY-18.

Contributed by Adrian Prendergast, Senior Analyst Mining, Energy. Original post here: (VIEW LINK)


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