Investors reacted positively to BHP Billiton’s third quarter update despite mixed results and a cut in its iron ore production target – the second this year.
The share traded higher than R205 on the Johannesburg Securities exchange mid-morning, easing to R202 by midday – from R197 at the start of trade.
Its production update for the nine months to end-March showed that while total iron ore production was unchanged at 171Mt, full year production is now expected to be 229Mt, 3% lower that prior guidance, due to adverse weather conditions and suspension of activities at Samarco in Brazil following the failure of the Fundão tailings dam and Santarém water dam in November.
Releasing its production update for the nine months to end-March, BHP said it was on track to deliver an average unit cost improvement of 14% across its major assets as a result of productivity gains.
Full year production guidance was maintained for petroleum, copper and coal.
Guidance at Western Australia Iron Ore (WAIO) was, however, reduced by 10 Mt to approximately 260Mt due to adverse weather and the initiation of an accelerated rail network maintenance programme.
BHP Billiton is planning a $640m petroleum exploration programme and four major projects under development are tracking to plan.
Chief Executive Officer Andrew Mackenzie, said productivity continues to improve “notwithstanding the disruption largely caused by adverse weather this quarter.”
He said steps taken to strengthen BHP Billiton, including asset sales and the deferral of investment for long-term value, will reduce output this year but have increased focus on high-quality operations and will support stronger margins and returns.
The lower iron ore guidance reflects lower expectations at WAIO, where production for the nine months increased 2% to a record 193Mt, reflecting the Jimblebar mining hub operating at full capacity and improved ore handling plant utilisation at Newman, partially offset by operational issues in the December 2015 quarter and the effect of adverse weather conditions and the rail network maintenance programme.
Samarco production was 11Mt but mining and processing operations remain suspended and sales from the final shipment of pellets from stockpiles will be settled in the June 2016 quarter.
At the end of the March 2016 quarter, BHP Billiton had four major projects in petroleum, copper and potash, with a combined budget of $6.9bn over the life of the projects.
An analyst, who asked not to be named, said production cuts at majors like Rio Tinto and BHP Billiton could be price supportive in the short term. But they continue to miss forecasts, which is of concern.
Investec said the defensive strategies BHP Billiton took at the time of its interim results “have left it well positioned to benefit from the expanded cash flows that higher commodity prices enable.”
Investec has increased its target price and upgraded to a hold recommendation. It does not expect the reduced iron ore guidance to be material.
Investec said BHP Billiton’s defensive stance, which included a new dividend policy, reduced capex and a higher operating cost reduction target have left it well positioned to benefit from better commodity prices “and we now expect the company to able to reduce net debt from current levels of $26bn to well under $17bn” by financial 2019.
Shaw and Partners analyst Peter O’Connor, quoted in the Sydney Morning Herald, said estimates for BHP’s earnings could fall by $150m on the back of the iron ore guidance cut.
