BHP Group: Copper Production Surges, and Better Commodity Outlook

BHP, the Australian mining giant, recently released its latest operating results for the nine months ending on March 31st, 2024. Investors are excited about BHP due to the hot commodity market, and its third quarter performance was closely watched. The new quarterly report was pretty much what the market expected and BHP's stock price on the US market went up by 2.55% on the day of the report's release.

BHP is a multinational corporation in the mineral resources and energy industries. It is the largest company in Australia by market value, and the world's largest mining company.

Its main business is the exploration, acquisition, development, and marketing of natural resources worldwide. Currently, BHP is divided into three business units, including Minerals Australia and Minerals Americas, which are differentiated by geographic location, as well as Petroleum.

Its pillar products include iron, copper, and metallurgical coal, accounting for 46%, 30%, and 20% of revenue, respectively. We will focus on analyzing changes in production volumes for these three major categories.

BHP lowered its guidance for metallurgical coal production to between 21.5 million tonnes and 22.5 million tonnes from between 23 million tonnes and 25 million tonnes. It maintained the production outlook of iron ore and copper.

BHP's iron ore mining operations are concentrated in Western Australia and Brazil.

In the first three quarters of the FY24, BHP's total iron ore production was 190 million tons, a 1% YoY decrease, mainly due to a decline in production in the latest quarter.

According to the report, during the three months ending in March, BHP's iron ore production was 61.5 million tons, a 7% decrease compared to the previous three months. This was mainly due to uncontrollable factors such as heavy rain, railway infrastructure construction, and forest fires.

BHP's copper mining is mainly concentrated in the mining areas of South Australia, Chile, and Peru. The specific distribution of mines is shown in the following figure. Chile has the world's largest copper reserves and production, and is also the main source of BHP's minerals.

Based on the latest operating data, BHP's copper production in Q3 of FY24 reached 465.9 thousand tons, and the total production for the first three quarters was 1.36 million tons - a solid 10% YoY increase. The company still expects the total annual copper production to be between 1.72 million tons and 1.91 million tons.

This is mainly thanks to the South Australian mining industry performing strongly and increased recovery rates and throughput at the Spence mine, resulting in record-high production. Additionally, there has been an improvement in both the grade and production at the Escondida mine.

BHP's coal business mainly deals with metallurgical coal, and they recently sold their jointly-owned metallurgical coal mines with Mitsubishi to Whitehaven Coal for a huge sum of $4.1 billion in cash.

However, in the first three quarters of FY24, BHP's total metallurgical coal production was 17.4 million tons, a 16% YoY decrease. This was mainly due to really bad weather (including the impact of two tropical cyclones) and operational challenges, which affected their production and unit costs.

Regarding BHP's revenue composition, in terms of regional business, its revenue mainly comes from China, Japan, and other regions in Asia. Among them, China accounts for 58% of its revenue and is its largest customer. Therefore, BHP's sales in China greatly affect its final revenue situation.

BHP expects that the decline in copper demand caused by the 2023 Fed rate hike has come to an end and the Chinese market will see a mild recovery in copper demand. However, the ongoing increase in China's domestic iron ore production and the construction industry's struggles may lead to a decrease in import demand for iron ore, which could negatively impact BHP's iron ore business. On a positive note, the demand for metallurgical coal is expected to rise steadily due to the growth of the steel industry in countries that import hard coking coal.

BHP is a big resources company that has high barriers to entry and benefits from economies of scale. They set their prices based on the unified market commodity prices. Recently, BHP's copper prices have gone up by 5% in the last three months of FY24 ending in March.

As of April 18th, BHP's stock price was 45 AUD and the company cares a lot about giving returns to its shareholders, offering a dividend yield of 5.6%. In the long run, global trends will keep driving demand for base metals and BHP should be able to keep up with the demand. If they can control costs while increasing production, BHP has the potential to make a good profit with rising prices in the commodity market. As industrial metal cycles strengthen, BHP still holds some investment value.