BHP share price dips following ‘solid’ production update

BHP share price dips

BHP Group (ASX: BHP) – the $120bn mining & metals company today released its quarterly activities report – covering the first-half of FY20 – to the market. The investor response was a modestly negative one: with BHP’s share price dropping 0.8% when the market opened. Such jitters should be framed in a broader context mind you, the stock after all, has risen ~5% in the last month.

This share price runup comes as iron ore prices remain elevated. For investors this is likely of short-term importance, given that the earnings of both BHP Group and Rio Tinto still remain heavily linked to the price of iron ore. BHP, for example, derived 48% of its earnings (EBITDA) from its iron ore operations during FY19.

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On a granular level and for the December quarter, BHP Group (ASX: BHP) reported iron ore production of ~60 Mt – taking their first-half FY20 production totals to 122 Mt. Though this is down 1% on a quarterly basis – a fact attributable to the 'completion of a major car dumper maintenance program in October 2019’ – production is up year-over-year.

Speaking of today's production results, BHP’s CEO, Mike Henry, said:

'We delivered solid operational performance across the portfolio in the first half of the 2020 financial year, offsetting the expected impacts of planned maintenance and natural field decline.'

Mr Henry further said:

'Production and cost guidance is unchanged, as we remain on track to deliver slightly higher production than last year.'

Though production has lagged in Q2 FY20, realised iron ore prices remain elevated. This was likely a fact that traders and investors had already latched onto prior to BHP’s production release today: after all, when Rio Tinto (ASX: RIO) released their own production results last week, the metals & mining company reported that its realised iron ore prices had risen ~36% in 2019.

In step with that, BHP Group reported a comparably favourable uptick in realised iron ore prices today: on a FOB basis, December H1 2019 average realised iron ore prices came in at US$78.30 per wet metric tonne – representing a 41% increase in realised prices, from Dec H1 FY18 to Dec H1 FY19.

Iron ore prices: the current situation

Though analysts and economists have been predicting a decline in iron ore prices for some time now – the mainstay commodity has remained robust in recent months, with the 62% Fe Fines spot price sitting at US$94.15 per tonne prior to the market open this morning.

This is well ahead of its CY19 lows of ~US$75 per tonne.

Speaking of the broad 2020 outlook, BHP’s management further commented that:

'Guidance for the 2020 financial year remains unchanged at between 242 and 253 Mt (273 and 286 Mt on a 100 per cent basis), with a stronger second half performance expected in line with our plans.’

Other considerations

Though iron ore production fell in the December 2019 quarter, today’s update revealed a strong quarter for the rest of BHP’s product mix.

Looking at some of BHP’s other key production results, on a quarter-over-quarter basis we see that Nickle production increased 37%, petroleum 4%, copper 6% and metallurgic coal and energy coal rose 17% and 8%, respectively.

The BHP share price currently trades at $40.84 per share.