It’s rare that a $9.06 billion profit underwhelms, but consensus targets for BHP Group Ltd (ASX: BHP) underlying profit were 4% higher at $9.42 billion.
The result was 1% lower than 2019, with some cost increases and COVID-19 related slowdowns impacting the business. It was also impacted by the devaluation of the Cerro Colorado mine and the cancellation of power contracts in Chile to be replaced with renewable energy generation.
BHP’s dividend was cut by 10% to $1.20 per share, but capital returns remain a key focus as the company’s cash flow generation remains strong – free cash flow was $8.1 billion.
The strength of BHP is reiterated every time it reports, with profit margins of 53% and some of the lowest-cost commodity divisions in the world.
For instance, BHP’s cost of iron ore production is just $12.63 per tonne, compared to current prices exceeding $100; the unit commands 64% of the business’s earnings. Interestingly, a $1 move in the iron ore price represents $233 million in earnings for BHP.
The copper division, which represents 19%, remains strong as global demand for electric vehicles and batteries continue to support demand for the foreseeable future. BHP’s cost of $1.01 compares favourably to current copper price of $2.80.
Additionally, management flagged the decision to exit the production of coal through a potential sale and highlighted huge efficiencies coming from the rollout of machine learning and automated work sites around the world. Who said mining companies couldn’t be technology leaders?
Summary: Another solid result, coal exit a positive, dividend remains secure.
For a detailed write-up on BHP’s result, check out this article from Rask Media’s Jaz Harrison: FY20 report: BHP (ASX:BHP) announces lower dividend, coal exit plans
This article was written by Drew Meredith, Financial Adviser and Director of Wattle Partners. To get in contact with Drew, click here to visit the Wattle Partners website.
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