Why shares of BHP Billiton Limited fell 4% today

Credit: Lucas Walters

BHP Billiton Limited (ASX: BHP) has continued a trend among the miners today in which it has failed to flatter investors with its production results.

The shares tumbled 4% after the miner delivered its operational results for the 2016 financial year, even though it said production of petroleum, copper and metallurgical coal had all exceeded their production guidance.

Here’s a quick recap:

  • 240 million barrels of oil equivalent (MMboe) of petroleum
  • 6 million tonnes (Mt) of copper
  • 43 Mt of metallurgical coal
  • 34 Mt of energy coal
  • 227 Mt of iron ore, and 257Mt at West Australian Iron Ore (WAIO)

As was the case with most commodities, overall iron ore production was slightly lower compared to FY15, and below guidance. This was partially due to the suspension of operations at Samarco, Brazil, following the tragedy that occurred at the mine late last year.

Although this was mostly offset by record production at WAIO, it wasn’t enough to protect the shares from a heavy fall today. However, the company confirmed that iron ore production is expected to increase again in FY17, forecasting production between 228 Mt and 237 Mt.

By comparison, rival Rio Tinto Limited (ASX: RIO) is striving to produce 330Mt of the resource this calendar year, while Fortescue Metals Group Limited (ASX: FMG) recently said it had shipped 169.4Mt this financial year.

On a more positive note, BHP said its petroleum capital expenditure had declined 50% to US$2.5 billion, with estimates that it will drop another 44% to US$1.4 billion in FY17.

It also expects to produce between 200 MMboe and 210 MMboe during the year, which is well below the production achieved in FY16. Again, this is also below the expectations of some analysts and may dampen their future earnings forecasts.

Additional Charges

Unfortunately for shareholders of BHP Billiton, the miner also flagged a number of additional items that will impact the group’s underlying profit.

In total, it expects up to US$175 million in charges related to redundancies and closures as well as impairments in its coal business. Meanwhile, an additional amount of between US$150 million and US$200 million could be recorded for global taxation matters.

Notably, the company is not yet in a position to update the market on the potential financial impacts of the Samarco dam failure.

Investor Takeaway

Although some investors may be tempted to buy BHP’s shares during the pullback in price, they do need to consider the risk that commodity prices could fall from their current levels. BHP’s shares have rallied hard in recent months and a pullback in prices could see their shares take another steep dive. Personally, I think there are far greater opportunities investors could look to take advantage of instead.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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