uploads///Iron ore

Why BHP Billiton Increased Its Guidance on Iron Ore

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Apr. 29 2015, Updated 1:06 p.m. ET

Iron ore production

BHP Billiton (BHP) iron ore production for the nine months ended March 2015 was higher by 17%, finishing at a record 172 million tons.

Western Australia Iron Ore, or WAIO, production for the nine months ended March 2015 increased by 16% YoY (year-over-year) to a record 188 million tons. This is due to continued improvement in BHP’s integrated supply chain and the successful ramp-up of the Jimblebar mining hub. WAIO also realized record sales volumes as a result of BHP’s strategy of increasing the percentage of direct-to-ship ore.

Samarco, Brazil, production increased by 37% YoY to 22 million tons—on a 100% basis—for the nine-month period. Samarco’s fourth pellet plant reached full capacity during the period, which led to the strong production performance.

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Guidance increased modestly

BHP has increased its guidance for fiscal 2015 iron ore production to 230 million tons. This guidance is 2% higher than it was previously.

WAIO production for fiscal 2015 is expected to be 250 million tons—on a 100% basis— which is 2% higher than previous guidance.

The company also says that further growth in its supply chain capacity—up to 270 million tons per year—on a 100% basis—should be achievable without any need for additional fixed capital investment.

As the potential of existing infrastructure continues to exceed BHP’s expectations, it has delayed the debottlenecking project planned for the Inner Harbor. This will mean lower capital costs for the company, but it will come at a price. Its objective to reach system capacity of 290 million tons per year will take longer to realize.

Iron ore prices hit a decade low of $47.08 per ton on April 2. This is mainly due to a supply glut created by iron ore miners, including BHP Billiton (BHP), Rio Tinto (RIO), Vale (VALE), and Fortescue Metals Group (FSUGY).

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Oversupply, coupled with weak demand from China, which constitutes two-thirds of the overall seaborne demand, is leading to an unprecedented fall in iron ore prices. This is hitting relatively smaller companies with high debt hardest. Cliffs Natural Resources (CLF) is one such company. CLF forms 3.8% of the SPDR S&P Metals and Mining ETF (XME).

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