BHP Group share price reacts to move in iron ore, but interim results impress

The BHP Group has released interim results for the 6 months ending December 2021 (1H21).

A summary of which is as follows (1H21 vs 1H20):

• Revenue +27%

• Profit before tax +61%

• Underlying profit +57%

• Return on Capital Employed 39%

• Interim dividend of $1.50 ($1.01 in prior years interim period)

Comments on results

BHP has produced a strong set of results with the largest contributor to earnings being iron ore (60% of Earnings Before Interest Tax Depreciation and Amortisation or EBITDA). Near record production levels at Western Australian Iron Ore (WAIO) helped contribute to a 50% increase in before tax profits from the division. Copper and coal, saw record prices realised over the six months to further support EBITDA. Strong earnings, improved cash flow and a reduction in net debt has shareholders being rewarded through a record interim dividend offering (nearly 50% higher than prior year’s comparative).

Iron ore remains the key commodity for the group. In the company’s full year outlook, guidance has suggested that headwinds in China (the group’s largest export destination) are starting to abate. However, the outlook for iron remains uncertain as noted by Chinese authority’s interjection through production limits, emission controls and more recently closer price scrutiny.

Broker recommendations (Australian listing)

As of the 15th of February 2022, a Refinitiv consensus of 15 broker recommendations suggests that BHP Limited sits somewhere between a hold and buy. However, the consensus also suggests that the share sits close to fair value currently with the long-term price target only 2% higher the last traded price.

BHP Limited (SA listing) – Technical view

The share price of BHP has come under since the release of results, although the move lower could be more in lieu of a sharp fall in the price of iron ore after Chinese authorities suggested closer scrutiny on pricing.

The longer-term trend remains up, although we are seeing a short-term correction of this trend right now. The corrections see a confluence of support at 49820 as its initial target. Should this level not hold, 47660 becomes a further downside target from the move. 47660 is a key level as it marks a major low. If this level is broken, we would consider the longer-term uptrend to be broken as well.

However, these levels have not yet been broken and the trend bias remains up despite the near-term correction. For long entry, traders will want to see a bullish price reversal before one of the aforementioned support levels. In this scenario traders could target a retest of the high at 54000, whilst using a close below the reversal low as a stop loss consideration for the trade.