Fundamental Insights Of Two Iron Ore Stocks: BHP Group PLC And Rio Tinto PLC

BHP Group PLC

BHP Group PLC (BHP) is a London, United Kingdom-based global resource company with more than 62,000 employees and contractors. The company primarily operates in Australia and America and is engaged in extracting and processing minerals, oil and gas. While the company’s global headquarters is in Melbourne, Australia, its products are sold worldwide. The company has two parent companies – BHP Group Limited and BHP Group Plc – as it operates under Dual Listed Group Structure, which are operated as a single economic entity.

Recent News

On 23 July 2019, the company announced to invest $400 million in more than five years to decrease climate change emissions. The incident has made the company the first miner to vow to tackle pollutions caused when consumers use its products.

On 11 July 2019, the company is exploring options for its thermal coal business including disposal amid a growing investor focus on environmental, social and governance issues. There is still no guarantee that BHP will divest its assets in Australia and Colombia. The company jointly owns Cerrejón with Glencore and Anglo American. It is having first right of refusal over its 33.3 per cent stake. However, neither company is keen to increase exposure to the Atlantic Basin coal market.

Operational Review (as on 17 July 2019)

The BHP group issued an operational update for the year ending 30th June 2019. The company’s petroleum production exceeded the management guidance and copper and iron ore production met the revised guidance for the period. The adverse weather conditions and lower wash plant yields resulted in the production of Metallurgical and energy coal remaining below the expectations.

The company’s production of copper equivalent surged by 11 per cent for the quarter ending 30th June reflecting strong operational performance. The production of copper equivalent for FY2019 declined by 2 per cent due to weather interruptions, unplanned outages and natural field decline.

The company expects to achieve guidance for unit cost at Western Australia Iron ore, Escondida and Petroleum. The unit costs for New South Wales Energy Coal and Queensland Coal are expected to be above marginally as guided.

Financial Highlights (H1 FY2019, US$ million)

(Source: Interim Report, Company Website)

In the first half of the financial year 2019 ending December 2018, the company’s reported revenue was $20,742 million as compared to $20,526 million in the same period of last year. There was a marginal improvement of 1.05 per cent due to an increase in revenue from Petroleum, Iron ore and coal segments whereas revenue from the company’s copper segment declined in H1 of the current financial year.

The company’s underlying EBITDA for H1 FY2019 stood at $10,539 million as compared to $10,836 million in H1 FY2018. The profit from operations from H1 FY2019 stood at $7,333 million as compared to $7,165 million in H1 FY2018. The company’s reported profit before tax for H1 FY2019 stood at $6,800 million as compared to $6,507 million in H1 FY2018.

The Profit after tax from continuing and discontinued operations stood at $4,149 million in H1 FY2019 as compared to $2,574 million in H1 FY2018. The company’s basic earnings per share stood at 71 cents in H1 FY2019 as compared to 37.9 cents in H1 FY2018. The Diluted earnings per share for H1 FY2019 stood at 70.8 cents as compared to 37.7 cents in H1 FY2018.

Share Price Performance

Daily Chart as at 25th July 2019, after the market closed (Source: Thomson Reuters)

On 25th July 2019, BHP Group PLC shares closed at GBX 1,958, down by 0.143 per cent against the previous day closing price. Stock’s 52 weeks High and Low is GBX 2,078.50 /GBX 1,391.99. At the time of writing, the share was trading 5.80 per cent lower than its 52w High and 40.66 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 4,161,875.20; 30 days – 4,572,671.33 and 90 days – 4,689,762.76. The average traded volume for 5 days was down by 8.98 per cent as compared to 30 days average traded volume. The company’s stock beta stood at 1.38, reflecting higher volatility from the benchmark index. The company’s outstanding market capitalisation was around £108.40 billion, with a dividend yield of 4.30 per cent.

From the simple moving average standpoint, shares of the BHP Group Plc were trading considerably above its 200-day and 60-day simple moving average prices.

On a YoY basis, the stock of BHP Group Plc has delivered a price return of positive 20.81 per cent, on a year-to-date basis, it was up by 24.52 per cent, and in the past three months, the stock has increased by approximately 6.38 per cent. The company’s stock price was down by 0.75 per cent in the past one month. Also, the stock was down by approximately 3.60 per cent in the past five trading sessions.

From the RSI standpoint, the 30-day, 14-day, and 9-day relative strength of the stock stood at 52.95, 46.55 and 40.43.

The company expects its production of copper equivalent for FY2020 to be higher than FY2019. All the major projects on which company is currently working are on track as planned.

The company boasts a strong balance sheet and fully funded capital investment plans, as, since the beginning of 2016, the group has reduced debt by $16 billion and reinvested $20 billion in the business. More than $25 billion have also been returned to shareholders. However, as the populist government emerges across the world, escalation in trade protection poses a downside risk to the group. China’s economic growth is projected to slow modestly in short to medium term, leading to a decrease in demand for commodities.

Top mining companies are facing increased pressure from institutional investors concerned about global warming to exit coal or cap production. The company’s usual policy is to sell its products at the prevailing market prices and the future demand and prices for commodities can experience fluctuation from volatility in global economic growth. Cost pressures may continue to occur over the resources industry, and as the selling price is market-driven, the company might not be able to pass on the costs to customers, straining the margins.

Rio Tinto PLC

Rio Tinto Plc (RIO) is a London, the United Kingdom-based leading mining and metal company listed on the London Stock Exchange. The company’s business is differentiated in three segments: finding, mining, and processing mineral resources. The company employs around 47,000 workforces operating in 35 countries over six continents. The company is an internationally renowned leader in Aluminium and one of the world’s most omnipresent metals.

Q2 FY2019 Operational Update (as on 16 July 2019)

In Q2 FY19, Pilbara iron ore shipments (100% basis) decreased by 3 per cent to 85.4 million tonnes as compared with the corresponding period of the last year. Pilbara iron ore production stood at 79.7 million tonnes, a decrease of 7 per cent against the previous year same period data. In Q2 FY19, Bauxite production was 13.4 million tonnes, an increase of 1 per cent against the same period in 2018. Aluminium production remains the same against the corresponding period of the last year. Mined copper production decreased by 13 per cent to 137 thousand tonnes in QFY19 against the previous year same period data, lower production from Kennecott and Escondida reflective of lower grades. Titanium dioxide slag production rose to 31 per cent to 303 thousand tonnes against the same period in 2018. IOC iron ore pellets and concentrate production increased by 191 per cent to 2.5 million tonnes as compared with the corresponding period of the last year. On 1st August 2019, the company will declare the first interim result for the financial year 2019.

Recent News

On 16th July 2019, the company announced delays on the second, complex underground phase. That means Mongolia, which owns 34 per cent, of Oyu Tolgoi will have to wait that much longer for its copper dividend, probably two years.

In the exchange filing made by the group as on July 16, 2019, the group recorded that it has diluted its entire stake in the Rossing uranium in Namibia to China National Uranium Corporation Limited for an initial consideration of $6.5 mn and a contingent payment of up to $100 mn.

Financial Highlights (FY2018, US$ million)

(Source: Annual Report, Company Website)

In FY18, the company reported consolidated revenue of $40,522 million, which was $492 million above than FY17 data. Underlying EBITDA during FY18 stood at $18,136 million, and it was comparatively 2 per cent lower than 2017 data, on account of rising in energy cost and raw material cost. Net earnings for FY18 stood at $13,638 million, up by 56 per cent against FY17 data. Net Cash flow generated from operations stood at $11,821 million, down by 15 per cent as compared to the FY17 data, particularly led by higher tax payments in connection to their FY17 profit and unfavourable movement in the working capital. In FY18, the company generated free cash flow of $6,977 million, down by 27 per cent against FY17 data. The basic earnings per share surged by 62 per cent to 793.2 cents as compared to 490.4 cents reported last year (FY17). In FY18, the company’s ordinary dividend per share surged by 6 per cent to US 307 cents.

Share Price Performance

 Daily Chart as at July 25, 2019, after the market closed (Source: Thomson Reuters)

On July 25, 2019, the company share price closed at GBX 4,575.5 and reduced by 0.673 per cent against the previous day closing price. Stock’s 52 weeks High and Low is GBX 5,039 /GBX 3,318.17. At the time of writing, the share was trading 9.20 per cent lower than its 52w High and 37.89 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 3,125,824.20; 30 days – 2,966,941.97 and 90 days – 3,012,567.39. The average traded volume for 5 days was up by 5.36 per cent as compared to 30 days average traded volume. The company’s stock beta stood at 1.37, reflecting higher volatility from the benchmark index. The company outstanding market capitalisation was around £77.73 billion and a dividend yield of 5.05 per cent.

From the simple moving average standpoint, shares of the Rio Tinto PLC were trading considerably below its 60-day and 30-day simple moving average prices.

On a YoY basis, the stock of Rio Tinto PLC has delivered a price return of positive 9.74 per cent, on a year-to-date basis, it was up by 22.67 per cent, and in the past three months, the stock has increased by approximately 0.70 per cent. The company’s stock price was down by 4.14 per cent in the past one month. Also, the stock was down by approximately 4.28 per cent in the past five trading sessions.

From the RSI standpoint, the 30-day, 14-day, and 9-day relative strength of the stock stood at 46.26, 37.14 and 29.77.

For the next couple of years, the company estimate global growth to weaken, unless US monetary policy normalises, and on-going trade tensions are put on rest. A surge in commodity prices in FY19 will have a favourable impact on the financials of Rio. Although, Rio has significant market share and any favourable development in the sector will drive growth in Rio as well.

In the international market, iron ore prices are consolidating amidst an ambiguity over the demand and supply dynamics; though, the prices of the commodity are still trading around the multi-year high levels amid supply shortage.