Shares of mining heavyweight BHP Billiton Limited (ASX: BHP) fell 1.2% today to $26.50 following the release of its production report for the year ended 30 June 2015 this morning.
In its announcement to the market, BHP Billiton said that it had achieved record production of iron ore, petroleum and metallurgical coal during the 12-month period, while it also continued to improve operating efficiencies and reduce costs despite a significant reduction in capital spend.
Commenting on the results, BHP Billiton's Chief Executive Officer Andrew Mackenzie said: "Our simpler portfolio following the demerger of South32 will help us maintain the pace of operational improvement, further supporting cash generation, margins and returns."
He added that: "Better productivity will be the sole source of volume growth at Western Australia Iron Ore in the 2015 financial year with production forecast to increase by seven per cent and unit costs are expected to fall to US$16 per tonne."
Five key facts you need to know from today's operational report:
- Group production rose 9% for the 2015 financial year with production from BHP's core portfolio growing by 27% over the last two years. BHP's spin-off of South32 Ltd (ASX: S32) in May this year should allow BHP to continue growing production of its core commodities.
- BHP beat its iron ore production forecasts with total production rising 14% to 233 million tonnes (Mt) for the year, while Western Australian Iron Ore (WAIO) production was up 13% to a record 254 Mt. As highlighted by the Fairfax press, analysts were expecting around 250 Mt for the year.
- For the year ahead, BHP expects a 6% increase in iron ore production to 247 Mt while WAIO production is set to hit 270 Mt. As highlighted above, BHP aims to reduce its production costs to just US$16 a tonne in order to offset the impact of the plummeting iron ore price. That will come as a nightmare for junior miners such as Mount Gibson Iron Limited (ASX: MGX), BC Iron Limited (ASX: BCI) and even the debt-laden Fortescue Metals Group Limited (ASX: FMG).
- While iron ore production is expected to lift in 2016, BHP has flagged a pullback across its other three pillar commodities. Petroleum production rose 4% to 256 million barrels of oil equivalent (MMboe) during the year, but is expected to fall 7% in 2016; metallurgical coal rose 13% to 43 Mt but is tipped to fall to 40 Mt in 2016; and copper production remained unchanged at 1.7 Mt but is expected to fall 12% to 1.5 Mt in 2016.
- BHP also flagged $350 million to $650 million in "additional charges" which mostly relate to its copper business. This is separate from the US$2.8 billion impairment it flagged last week on its US Onshore assets – most of which relates to its gas-focused Hawkville field.
Like almost every other miner, BHP has come under enormous pressure in recent times as a result of China's economic slowdown and the subsequent plunge in commodity prices. Iron ore is fetching just US$52 a tonne while coal, petroleum and copper prices all remain depressed as well with cost cutting activities seen as a necessity to the company's future success.
Given its low-cost operations and diversified asset base, BHP Billiton is arguably the best positioned miner to weather the commodities storm being caused by a slowdown in China and record global production. In saying that however, BHP is still exposed to the commodities downturn which will not only impact its margins, but could also affect its ability to continue generating sufficient cash to fund its growth and dividend distributions.
While BHP Billiton remains my miner of choice, I believe investors could do far better in the long-run by looking in other underappreciated sectors of the Australian sharemarket for their investment ideas.
