BHP shares fall on multi-billion profit hit from nickel and Samarco

The mining giant isn't optimistic that nickel prices will improve any time soon.

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BHP Group Ltd (ASX: BHP) shares are under pressure on Thursday morning.

At the time of writing, the mining giant's shares are down 1.5% to $45.25.

Why are BHP shares falling?

Investors have been hitting the sell button today after the company announced a number of exceptional items that will show up in its upcoming half-year results.

According to the release, these items relate to an impairment of the carrying value of the Nickel West operations and West Musgrave project (Western Australia Nickel) and an increase to the provision for the Samarco dam failure.

Nickel impairment

Management highlights that the nickel industry is facing challenges and there has been a sharp fall in nickel prices.

This has been driven by the supply of nickel from Indonesia significantly increasing and the London Metals Exchange accepting Indonesian-origin nickel products in response to evolving industry dynamics.

Unfortunately, BHP believes these unfavourable operating conditions will endure for a considerable time. Combined with cost pressures, BHP has been forced to impair the Western Australia Nickel's assets by US$2.5 billion. This reduces the carrying value of the assets to negative US$0.3 billion.

BHP will also record underlying EBITDA of approximately negative US$0.2 billion at Western Australia Nickel in its half-year results.

Management continues to optimise operations at Nickel West and options are being evaluated to mitigate the impacts of the current low prices.

BHP CEO Mike Henry said:

This is an uncertain time for the Western Australia nickel industry and we are taking action to address the current market conditions.

We are reducing operating costs at Western Australia Nickel and reviewing our capital plans for Nickel West and West Musgrave.

Samarco provision

Also putting pressure on BHP shares is news that the miner will also recognise an income statement post tax charge of US$3.2 billion in relation to the Samarco dam failure.

This reflects the assessment of the estimated costs to resolve all aspects of the Federal Public Prosecution Office Claim and the Framework Agreement obligations.

Henry adds:

BHP Brasil along with Samarco and Vale continue to progress negotiations towards a settlement of the Federal Public Prosecutor Office Claim and Framework Agreement obligations in Brazil.

The Renova Foundation has made good progress on reparation and compensation programs and over 84% of the community resettlement cases have been completed.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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