uploads///Iron ore

Could BHP Fall below Its Fiscal 2016 Iron Ore Guidance?

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Jan. 21 2016, Updated 1:12 p.m. ET

Iron ore volumes

Iron ore volumes are key to BHP Billiton’s (BHP) (BBL) iron ore segment’s revenue. The majority of its revenues come from iron ore.

In the current scenario of oversupply and weakened demand, big iron ore companies maintain a strategy of increasing their volumes in order to reduce the pressure on revenues, cash flows, and ultimately the bottom line. In this part of our series, we’ll look at BHP’s outlook for iron ore volumes.

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Miss in iron ore volumes

BHP Billiton’s iron ore production for fiscal 1H16 was 118 million tons, a growth of 4% year-over-year. Below is a production breakdown:

  • WAIO (Western Australia Iron Ore), BHP’s main iron ore asset, produced a record 131 million tons (on a 100% basis) in fiscal 1H16 due to the ramp-up of the Jimblebar mining hub and improved iron ore handling plant utilization at Newman. However, strong production was somewhat offset by one-offs such as a train derailment and a power outage at the port.
  • As expected, iron ore production at Samarco, Brazil, fell by 25% on a year-over-year basis in 1H15, reaching 11 million tons on a 100% basis. This fall was due to the suspension of operations at Samarco following a tailings dam failure on November 5, 2015.

Guidance downgraded

BHP management has downgraded its guidance for iron ore due to the Samarco incident. Its new guidance for fiscal 2016 is 237 million tons, which is 4% below the previous guidance. The company’s guidance for WAIO remains unchanged at 270 million tons (100%). This is despite one-off operational issues encountered by the company during the December quarter such as a train derailment and a power outage at the port.

The company maintained that further improvements in the efficiency of the integrated supply chain should deliver an increase in system capacity to 290 million tons per year (or Mtpa) over time.

The achievement of guidance for WAIO might be a little difficult for BHP, as it will have to produce at a run rate of 280 Mtpa for the second half of fiscal 2016 to achieve this. The start of the wet season in Australia could make this task even more difficult.

Meanwhile, RioTinto (RIO) reported a strong set of production numbers for the quarter ended December 2015.

Vale (VALE) will release its 4Q15 results in February 2016, while Cliffs Natural Resources (CLF) will release its 4Q15 results on January 27, 2016. Cliffs is experiencing lower iron ore shipments due to lower export volumes and lower demand from steelmakers in the United States (SPY) (IVV).

Cliffs forms 3.6% of the SPDR S&P Metals and Mining ETF (XME). Vale forms 1.8% of the iShares MSCI Brazil Capped ETF (EWZ).

Continue to the next part of this series for a discussion of BHP Billiton’s falling coal production in fiscal 1H16.

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