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BHP increases full-year iron ore guidance

Shares in mining giant BHP Billiton (ASX: BHP) are in for a boost this morning following the release of its first quarter operational review, whereby the company maintained strong momentum and produced record supplies of iron ore and petroleum.

Iron ore, which is one of the company’s primary products, achieved record production of 54 million tonnes (49 million tonnes of which is BHP’s share), which resembles a 23% increase compared to the prior corresponding period (pcp) and a 2% increase on the previous quarter. A strong operating performance across the supply chain as well as first production from the Jimblebar mine – which was 6 months ahead of schedule – largely contributed to this outcome.

Following the result, the miner upgraded its 2014 financial year guidance to 212 million tonnes – a 5 million tonne increase on prior guidance. Whilst iron ore’s price has remained resilient around the US$130 per tonne mark for much of the quarter, investors will take this news very well.

Whilst full year production guidance was maintained for petroleum, the miner also achieved record production of the commodity during the quarter, producing 62.7 million barrels of oil equivalent – a 2% increase compared to the pcp and a 6% increase on the June quarter. This was aided by a 16% increase in the production of crude oil underpinned by significant growth in Onshore US volumes, particularly in the Black Hawk and Eagle Ford sites.

The company also maintained its full year guidance for the production of copper and coal.

Whilst BHP increased production in each of its major divisions this quarter, it also recognises that it must continue to cut costs to ensure long-term sustainability and profitability on projects, as well as to increase returns to shareholders. Internal competition for capital has significantly increased this year following a 25% reduction in capital and exploration to US$16 billion, with the rate of expenditure to decline further next year.

BHP isn’t the only miner to follow this strategy. While commodity prices are expected to fall in the long-term with supply increasing and demand decreasing, Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) are also limiting capital spending and cutting costs.

Foolish Takeaway

BHP remains the most diversified Australian miner and is therefore arguably the safest bet for investors. With commodity prices remaining resilient, the increased output will reflect well on earnings. However, the sector is still facing significant headwinds, and investors must decide whether the investment is worth the risk.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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