BHP Earnings Hang Primarily on China

After rival Barrick reported disappointing results, the focus is on the Australian miner to see if improving relations with China can lift its  outlook.

It's All About China and Iron Ore and Coal

Last year, the lockdowns in the world's largest resource consumer drove down the price of many commodities. Iron ore is particularly relevant to BHP, which bottomed out in price in the middle of the last quarter. It has recovered since then, but the average price was the lowest of the year. 

Iron ore represents a little less than half of the company's sales but crucially well over half of its underlying EBIT. Even more critical for the future is the relatively higher EBIT margin coal provides. China has unofficially banned coal imports for the last couple of years, but improving relations between Beijing and Canberra might mean the coming year will be different. Especially with China having increased energy demand and being more keen to avoid the blackouts experienced during last year's drought.

Commodities Spike to Boost Guidance?

The consensus of estimates compiled by the company expects earnings to come in at $1.35 on total revenue of $25.6B for the first half. The company already reported second-quarter production results back in January, showing a substantial growth in copper production over the prior year, thanks to improving circumstances in Chile. It also affirmed production targets but did warn that costs were becoming an issue, with inflation and supply chains threatening to compress margins.

Focus is likely on the interim dividend plan as the company tries to maintain stock prices while profit margins are under pressure. Commentary on the potential impact of an expected reopening in China will likely be in focus. Price gains in commodities since the end of the last quarter could allow the company to improve its guidance for the second half of the year.

BHP GROUP in Correction Mode

The stock price of BHP rose to a 10-month high of 2880 in late January and has started to correct since. It's unclear whether the flag has completed in shallowness or continues lower, but the predominant trend remains up. Above the local peak, the 3k handle comes into focus, whereas below 2700, 2550 is next.

Source: Spreadex

Key Takeaways

BHP Group relies heavily on iron ore and coal for its revenue, which were impacted by last year's China lockdowns. The firm intends to release its first-half earnings along with a dividend plan and could potentially update its guidance depending on the commodity price increase seen since the end of last quarter. The stock price is correcting after reaching a 10-month high in late January.