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BHP Billiton: Should We Expect More Value after Fiscal 2017 Results?

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Part 4
BHP Billiton: Should We Expect More Value after Fiscal 2017 Results? PART 4 OF 10

BHP Billiton and Iron Ore Unit Costs: A Peer Comparison

Iron ore costs

Iron ore makes up 45.0% of BHP Billiton’s (BHP) (BBL) underlying EBITDA (earnings before interest, tax, depreciation, and amortization) and 38.0% of its revenues. Since it’s the single largest commodity produced by BHP, it’s important to look at the costs since this division determines the company’s profitability and ultimately impacts BHP stock.

BHP Billiton and Iron Ore Unit Costs: A Peer Comparison

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Production at WAIO

BHP’s iron ore asset WAIO (Western Australia Iron Ore) contributes more than 90.0% of the company’s total iron ore production. Production at this site rose 4.0% to 231.0 million tons in fiscal 2017, mainly due to strong productivity measures across the supply chain. The commissioning of a new primary crusher and additional conveying capacity at the Jimblebar mine also supported higher production.

The company expects WAIO production to rise between 239.0 million and 243.0 million tons in fiscal 2018. The rise is expected due to continued productivity improvements and improved reliability across the supply chain. BHP expects production to be weighted more toward the last three quarters of fiscal 2018 due to scheduled port de-bottlenecking activities and lower inventory levels.

Unit cost reduction

WAIO’s unit costs fell 3.0% to $14.60 per ton, supported by reductions in labor and contractor costs and increased equipment productivity. However, the following factors offset the fall in costs:

  • stronger Australian dollar
  • stock write-off at the Yandi mine
  • additional costs related to the accelerated rail renewal and maintenance program

BHP expects unit costs to fall further to $14 in fiscal 2018.

BHP has improved its unit costs, but they’re still higher than its closest peer, Rio Tinto (RIO), which reported unit costs of $13.80 per ton for its Pilbara operations in the first half of 2017. Vale (VALE) had slightly higher C1 cash costs of $15.20 per ton. Its unit costs have a significant improvement potential as its S11D project reaches full production. Cliffs Natural Resources’ (CLF) costs for its US iron ore division rose 5.7% year-over-year in 2Q17.

BHP Billiton, Rio Tinto, and Vale make up 32.1% of the iShares MSCI Global Metals & Mining Producers (PICK). The SPDR S&P Metals and Mining ETF (XME) also provides exposure to this space.

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