BHP up 2.5% as the market digests good production report

Investors have waited anxiously for the country’s biggest revenue earner to release its production and operation report for the last year.

Amid weakening commodity prices across the board, BHP Billiton  (ASX: BHP) has reaffirmed it has a promising future ahead. Investors weren’t expecting such high production guidance from the company’s two major assets namely its Western Australian iron ore and Escondida projects.

All divisions across the company posted gains but perhaps the most disappointing figure was its 6% increase in petroleum production, which the company attributed to maintenance and drilling delays at the non-operated Gulf of Mexico assets. Petroleum represents 15% of the company’s revenue and analysts were hoping for a better performance as it remains a very lucrative business for company and has an ROA of currently around 35%.

Iron ore, the company’s biggest revenue earner posted its 13th consecutive annual record, upping production of the steelmaking ingredient by 7% to 170 million tonnes. This stems largely from its Western Australia Iron Ore (WAIO) business. In its final quarter WAIO delivered an annualised rate of 217 million tonnes, which will represent significantly higher returns in the long run, particularly as the company aims to progressively cut costs through “debottlenecking of the supply chain” which underpins low cost growth. Macquarie says the outlook for fiscal 2014 looks good with the stronger iron-ore production guidance, whilst the miss in its petroleum output will likely affect next years’ result.

Macquarie has put an outperform recommendation on the stock and set a price of $39 per share.

Its Escondida copper facility in Chile also boasted significant increases, upping production by a massive 28% to 1.2 million tonnes and is expected to be sustained throughout the 2014 financial year.

Other promising results included:

  • Zinc production increased 14%
  • Uranium production increased 6%
  • Total metallurgical coal production increased 13%
  • Energy coal increased 3%
  • Alumina increased 18%
  • Manganese ore increased 7%
  • Aluminum increased 2%
  • Natural gas increased 6%
  • Manganese alloy production remained flat and lead/silver dropped off 11%.

Foolish takeaway

Investors needed reassurance that BHP is on track to producing promising results at its preliminary profit announcement on 20 August. Despite the record announcements posted by BHP and Rio Tinto (ASX: RIO) yesterday, the impact of lower commodity prices is likely take its toll on earnings both for both FY13 and beyond. Despite massive cost cutting campaigns by our biggest miners, BHP has spent an estimated $US 4.8 billion on onshore US drilling and development which highlights the profitability of the new US oil boom.

Deutsche Bank analyst Paul Young said today’s result was “very strong” and it was ahead for every single commodity with the exception of petroleum. He also said that the company’s forecast of 207 million tonnes of iron ore production next year is “very conservative” and added “we think they will beat that”. BHP remains the best diversified miner on the ASX and pays strong dividends and currently represents much better value than its Australian mining counterparts including Fortescue (ASX: FMG), Rio and Newcrest (ASX: NCM).

Eyes will now turn to Fortescue, which releases its report next Tuesday.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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