BHP shares: why did they drop after the latest FY21 Q3 report?

• Record iron ore production of 188 metric tonnes in year-to-date
• Metallurgical coal production cut to 70-73 metric tonnes
• Price of iron ore reaches a ten-year high
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Global commodities giant BHP Group (BHP.AX) posted its full-year (FY21) third-quarter (Q3) update on 20 April, causing the BHP share price to fall from $47.43 to lows of $46.19. Why did investors look to sell off BHP shares and will this downward trend lead to a longer-term retraction?

The report began with revealing record levels of iron ore production across Western Australia, totalling 4% year-on-year (YoY) growth to 188.3 million tonnes. It was also supported by record average throughput at its Escondida copper mine in Chile, which saw copper production guidance for FY21 rise from 1535 kt to 1660 kt.

Did inclement weather harm coal production and BHP shares?

Although the BHP Group left annual production guidance for iron ore untouched for the remainder of FY21, it downgraded a string of additional commodities, citing poor weather conditions. Production guidance for metallurgical coal has been limited to 39-41 metric tonnes, which has had a knock-on effect on the unit cost of Queensland Coal, rising to $78 per tonne.

Production guidance was also slashed for energy coal to 18-20 metric tonnes from a previous target of 21-23 metric tonnes.

Is the BHP share price affected by missing iron ore production targets?

Q3 iron ore production weighed in at 66 metric tonnes, which was short of the 67.2 metric tonnes targeted previously set by Macquarie (MQG.AX). This is 4% lower in Q3 than Q2 and has been blamed on inclement weather and equipment maintenance.

The recent hurricane season in the Gulf of Mexico has also played havoc with BHP’s petroleum production from the year-to-date to March 2021. It’s down 8% so far to 75.8 metric tonnes. Meanwhile, metallurgical coal had fallen by 2% to 28.8 metric tonnes and energy coal had fallen hugely year-on-year by 17% to just 4.8 million tonnes.

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Will the price of iron ore and investment in further projects underpin BHP shares?

The BHP share price may be buoyed by the continued resurgence in Iron Ore (IRN) spot price. The steel-making commodity reached ten-year highs of 178.54p before the close of trading on 20 April, driven by demand far outstripping supply. This confidence may be welcomed by the BHP Group, with the ability to achieve full value for their supply.

Also, BHP Group is forging ahead with investment plans in new projects. Some $8.5 billion has been ring-fenced for four key projects spanning iron ore, petroleum and potash production. The marquee South Flank iron ore project is still on course to commence production by the end of Q2 2021.

Mike Henry, BHP Group chief executive, said the mining giant is ‘reliably executing [its] major projects, bringing on new supply in copper, petroleum and iron ore’.

BHP has also entered a joint venture with Exxon Mobil Corporation (XOM.N) in West Barracouta’s natural gas field to generate domestic gas supply for the east coast of Australia. West Barracouta has untapped premium gas resources that should help to underpin BHP’s Bass Strait natural gas production and diversify its domestic customer base further.

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