BHP flags disruption risk for iron ore business

BHP has warned of a difficult outlook for its flagship iron ore business because of the proposed easing of border restrictions in Western Australia.

In an operational review released on Wednesday, the world’s biggest miner cut guidance for its coking coal division that is based on the other side of the country, citing absenteeism caused by the Omicron coronavirus variant.

Although BHP maintained iron ore production guidance for the year to June at 278m to 288m tonnes, it said the planned reopening of Western Australia’s boarders on February 5 was likely to “introduce some short-term disruption to the operating environment as the Covid-19 pandemic evolves in the state”.

Mineral-rich Western Australia has maintained a hard line on border controls throughout the pandemic, which has been a double-edged sword for the mining industry.

The low rates of the virus in the region have allowed the iron ore operations run by BHP, Rio Tinto and Fortescue Metals Group to keep running at full speed. However, the policy has led to problems with flying in skilled workers from eastern states because of travel restrictions, hampering some projects.

BHP’s iron division, which generates the bulk of the company’s profits, finished 2021 strongly with the restrictions still in place.

It produced 73.2m tonnes of iron ore from its mine in the Pilbara region of Western Australia in the three months to December, up from 70.8m tonnes in the same period in 2020, and exported 144m tonnes of the steelmaking ingredient in the six months to December.

Tyler Broda, analyst at RBC Securities, said BHP’s performance was better than expected, with its mines in the Pilbara shipping at an annualised rate of about 295m tonnes over the quarter, and continuing to “post superior performance” to arch-rival Rio Tinto, which reported production results on Tuesday.

Outside of iron ore the news was less good.

BHP revised its coking coal guidance for the year to June to 38m-41m tonnes from 39m-44m tonnes, citing Omicron’s impact on the workforce, which the company expects to continue into the early part of this year.

It also warned of an almost $500m hit to its half-year results due in February from impairments, and revealed further payments related to the 2015 Samarco dam disaster in Brazil.

BHP said it would take an impairment of up to $450m on deferred tax assets that it would no longer be able to claim once it had completed the sale of its oil division to Australia’s Woodside.

The company also said it had agreed to fund a further $700m in financial support for Renova Foundation, set up to oversee reparations for the dam disaster under a settlement with Brazilian prosecutors, and warned provisions might have to be increased following a recent court ruling on compensation eligibility.

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The breach of the Fundão tailings dam at the Germano mining complex in 2015 killed 19 people and polluted one of Brazil’s largest river basins with a torrent of mining waste. Samarco is a joint venture between BHP and Vale.

“There is an ominous statement on Samarco outlining a ruling which has extended the scope of its compensation with potential that the provision could materially increase,” noted Broda.

Analysts still expect the company to declare a dividend of up to $8bn with February’s results on the back of rising commodity prices. In the six months to December, BHP received on average $113.54 a tonne for its iron ore, up 9 per cent from a year ago.

BHP shareholders will vote later this week on plans to collapse its dual-listed corporate structure in London and Australia and move its main stock market listing to Sydney. Analysts expect the proposal to be approved.

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