Investors shake off BHP’s major profit slump

Shares in BHP (ASX:BHP) took an early tumble on Tuesday (20 February 2024) after the mining giant reported an almost 86% decline in half-yearly profit after tax for the 6 months to 31 December 2023. 

Despite a 6% increase in half-yearly revenue to US$27.232 billion, BHP posted just US$927 million in profits. For reference, the company posted US$6.5 billion in profits after tax over the same time the previous year. 

BHP attributes the profit drop to some US$5.7 billion of exceptional charges relating to the impairment of its Western Australia Nickel West arm and its Samarco dam failure. 

It’s not just BHP facing challenges in the nickel space with the entire Australian industry is in hot water as commodity prices slump, prompting the federal government to this week outline some short-term targeted support for the sector. 

It’s for this reason, perhaps, that BHP’s shares have largely shaken off the early losses — not something investors could typically expect following such a steep profit decline from a multi-billion-dollar stock. 

While BHP shares suffered an early dip of 1% to trade at around $45.60, the company has recouped the worst of the losses to trade just 0.13% lower at $45.98 as of midday AEDT. 

It seems to come down to several factors. Firstly, investors have already priced in the nickel-related impairments. 

The nickel industry has been in turmoil for months, so it comes as no surprise that the biggest players in the game are taking the biggest hits. For though BHP’s daily loss might be slim, its 2024 performance tells another story. 

On 28 December 2023, BHP shares hit a yearly high of $50.72 — meaning today’s prices mark a decline of nearly 10% over less than 2 months. 

Secondly, BHP’s half-yearly report, despite the nickel and Samarco-related woes, brought no real surprises to investors.

The company’s underlying earnings before interest, tax, depreciation, and amortisation (EBITDA), for example, increased by a marginal 5% compared to the previous corresponding period to US$13.9 billion. 

Further, the mining giant’s underlying attributable profit — meaning when not accounting for the major one-off expenses — was largely in line with the year before at US$6.6 billion. 

This all comes despite some higher operating costs, with strong iron ore and copper prices supporting BHP’s revenue growth and helping offset the nickel impairments. 

Commenting on BHP’s earnings results for the half-year, Saxo Asia Pacific Senior Sales Trader Junvum Kim says: “BHP’s first-half underlying profit of US$6.6 billion was little changed year-on-year, supported by high iron ore and copper prices.

However, the interim dividend of US$0.72 is the lowest since 2020, as the company battles lagged inflationary pressures on labour and unit costs, which offset the FY24 sales growth outlook of 10%.”

Moody’s Investor Service Senior Analyst Saranga Ranasinghe says BHP’s 6-month results were in line with industry expectations. 

“BHP’s credit profile remains strong, supported by its low-cost asset base and conservative financial policies. We expect these strengths will continue to support BHP’s peer-leading EBITDA margins and credit metrics in line with our tolerance levels for its rating,” Ranasinghe says. 

“Uncertainty remains over the level of support BHP will need to provide to Samarco and potential payments the group may need to make. However, given the provisions already taken and the group’s strong liquidity profile, we currently expect these future costs to be manageable within the rating parameters.”

Ranasinghe adds that while BHP’s capital expenditures are likely to increase in the coming years, reflecting the company’s spending on its pipeline of ‘future-facing’ commodities projects, analysts expect the mining giant to meet its net debt targets and ‘conservative capital allocation framework’. 

As such, while BHP’s hefty profit dive may seem alarming at a glance, analysts and investors don’t seem particularly bearish on the long-term fundamentals of the business.

In any case, the short-term impacts of the struggling nickel industry and Samarco dam issues mean BHP will not be stuffing the stockings of investors as thickly as in previous years: BHP has declared a 72 US cent half-yearly dividend for FY24 compared to the 90 US cent dividend paid out for the same period the year before. 

This dividend marks a US$3.6 billion payout to shareholders, equating to a payout ratio of 56%.

Images: BHP
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Written By Joshua Smith
Joshua Smith has years of experience in the media sector, having worked as a markets reporter, features writer, and editor since completing a Communications and Journalism degree and a Creative Writing degree. Josh is an avid board game fan and a self-professed coffee snob.