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Why BHP Delivered Record Iron Ore Production in Fiscal 2015

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Sep. 10 2015, Updated 4:06 a.m. ET

Iron ore volumes

Iron ore volumes are key to BHP Billiton’s (BHP) (BBL) iron ore segment’s revenue. The other factor, seaborne iron ore prices, is determined by demand-and-supply dynamics, which are currently leading to pressure on prices. In such a scenario, it’s big iron ore miners’ stated strategy to increase their volumes to reduce the pressure on revenues, cash flows, and ultimately the bottom line. In this article, we’ll see how BHP is working to increase its iron ore volumes.

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Record iron ore volumes

  • BHP Billiton’s iron ore production for fiscal 2015 was a record 233 million tons, a growth of 14% year-over-year.
  • Optimization at port facilities and an increase in direct-to-ship ore resulted in record sales volume in Western Australia iron ore (or WAIO), BHP’s main iron ore asset, of 256 million tons on a 100% basis.
  • Samarco, Brazil, production increased 33% year-over-year to 29 million tons on a 100% basis. Samarco’s fourth pellet plant reached full capacity during the period, which led to the strong production performance.
  • Most of the production improvement is due to improvement in the integrated supply chain and the successful ramp-up of the Jimblebar mining hub.

Forward expectations

  • BHP management expects total production to increase by 6% in fiscal 2016, to 247 million tons, driven by improved efficiency at Mining Area C, Newman, and rail and port operations.
  • BHP has underpinned productivity as the only source of volume growth at WAIO in fiscal 2016. This will contribute to BHP’s iron ore production target of 290 million tons per annum over time.
  • Management has also slightly revised its view on steel production in China. It now expects production to peak at 935–985 million tons in the mid-2020s. BHP’s previous view was for a peak of 1–1.1 billion tons in the mid-2020s. While the new expectation is only slightly lower, it’s significant, as one of the major iron ore producers has started talking about softening demand.

In the near term, management believes iron ore prices will remain subdued and high-cost operations will continue to be curtailed. Rio Tinto (RIO) believes iron ore is in a relatively balanced position, as 120 million tons of capacity should exit this year compared to 100 million tons of new seaborne iron ore capacity coming online.

Vale SA (VALE) has already announced a curtailment of 30 million tons of higher-cost iron ore production. Cliffs Natural Resources (CLF), on the other hand, is experiencing lower iron ore shipments due to lower export volumes and lower demand by steelmakers in the United States (SPY).

BHP is delivering on the iron ore volumes front. But in the next part of this series, we’ll see how it’s progressing on the cost front in order to weather the current weak iron ore price environment.

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