Records fall at BHP

Better-than-expected production is clearly a positive for BHP Billiton and lends valuable support to the share price, currently at a 16-month high. But the iron ore miner has increased forward guidance, too, and continues to look an interesting play in the sector.

Output over the year to June rose by 9% following a fourteenth consecutive annual production record of 225 million tonnes (Mt) at the Pilbara iron ore operation. BHP now expects an increase in production to 245Mt at Pilbara over the next 12 months, largely due to the ramp-up of the Jimblebar mine to 35 Mt per annum by Christmas.

Iron ore accounts for over 80% of BHP's non-liquid output, but coal and copper production also beat expectations, hitting 45Mt, while copper output grew to 2.7Mt. In fact, 12 of BHP's operations and four commodities had their best year ever.

Chief executive Andrew Mackenzie expects "strong momentum" to continue into next year, with the group achieving its two-year 16% production growth guidance at the end of its 2015 fiscal year.

"A broader improvement in productivity is expected to underpin stronger iron ore, copper and metallurgical coal volumes. We will remain focused on value over volume as we prioritise our brownfield development options and consider the next phase of portfolio simplification," he says.

BHP's results follow those of rival heavyweights Rio Tinto and Anglo American last week, with the former also reporting record volumes. While strong output is good news for shareholders in the majors, it is putting a downward pressure on the price of iron ore, which is currently suffering from falling Chinese demand.

Iron ore traded as high as $140/t only a year ago. It was just $90/t in mid-June and currently trades down a quarter on the year, according to data from Investec Securities. The price BHP received for its iron ore fell from $110/t to $103/t year-on-year, but it plans to ramp up production by 20Mt to offset this, in a bid to win greater market share.

Analysts from VSA Capital warn: "With BHP's full-year 2015 iron ore production estimated at 245Mt and future production pushing towards 270Mt, we continue to see expansions by the large, low-cost producers resulting in a global surplus. This is already having an impact on the high-cost producers. In our view, BHP's growth plans have the effect of consolidating and gaining market share in an adequately supplied market, at the expense of the less efficient producers."

Barclays reckons the firm's forward guidance is "encouraging" ahead of its full-year financial earnings on 19 August. At 2,076p, BHP trades on 13.2 times earnings forecasts for 2014, dropping to little more than 12 for 2015. A prospective dividend yield of 3.7% looks attractive, too.

"On our estimates, BHP sports the highest margins among the diversified, best liquidity, highest earnings growth and returns plus a long energy position and a decent yield," says Barclays. "It has formulated a compelling growth programme that we expect to drive earnings over the next two years. Finally, we believe it offers protection against sector underperformance."

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