BHP Earnings: Down on Lower Prices and Higher Costs, Led by Iron Ore

No-moat BHP’s fiscal 2023 result was similar to our expectations. Adjusted NPAT was USD 13.4 billion, or USD 2.65 per share, down from USD 23.8 billion last year. Adjusted EBITDA fell by about a third to USD 28 billion driven by lower prices and higher costs, partially offset by higher volumes and favorable foreign exchange rates. BHP will pay a fully franked final dividend of USD 0.80 (about AUD 1.25) per share in September, taking total fiscal 2023 dividends to USD 1.70 (AUD 2.66) per share fully franked. This is 15% below our estimate with the 64% payout ratio lower than our 75% assumption. BHP is in strong financial shape, with modest net debt of roughly USD 11 billion or 0.4 times fiscal 2023 EBITDA. We expect net debt/EBITDA to remain below 1 for at least the next five years, absent any major acquisition.

The latest guidance is immaterial to our fair value estimate, which we retain at AUD 39.50. However, we reduce our assumed dividend payout ratio to 65% from 75% and forecast a fiscal 2024 dividend of about USD 1.90 (AUD 2.97) per share, for a 6.9% fully franked yield. BHP shares trade at a small 8% premium to fair value.

We forecast fiscal 2024 iron ore sales of about 260 million metric tons (BHP’s share), a 3% increase on last year, with iron ore accounting for 56% of forecast 2024 EBITDA of about USD 29 billion. The portfolio is gradually changing with iron ore likely to modestly reduce in importance in the future. BHP is ramping up investment in “future-facing commodities” such as copper and nickel, which are more likely to benefit from reducing carbon emissions. This strategy was behind its recent purchase of copper miner Oz Minerals. It is also entering the potash market via its Jansen development in Canada. Along with our forecast for iron ore prices to fall to roughly USD 60 per metric ton by midcycle from 2027, these investments mean we expect iron ore to decline to less than half of BHP’s fiscal 2028 EBITDA. Copper rises to 38%, from less than 30%.