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Why BHP Billiton Fell Short in Meeting Its Fiscal 2016 Guidance

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Jul. 25 2016, Updated 1:08 p.m. ET

Iron ore volumes

Iron ore volumes are key to BHP Billiton’s (BHP) (BBL) Iron Ore segment revenue. In the current scenario of oversupply and weaker 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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Lower-than-expected iron ore volumes

BHP Billiton’s iron ore production for the fiscal year ended June 30 (or fiscal 2016) was 227 million tons. This was slightly lower than BHP’s fiscal guidance of 230 million tons. Below is a production breakdown:

  • WAIO (Western Australia Iron Ore), BHP’s main iron ore asset, produced a record 257 million tons (on a 100% basis) in fiscal 2016 as the Jimblebar mining hub operated at full capacity. The improved iron ore handling plant utilization at Newman also helped volumes at WAIO.
  • The strong production at WAIO was somewhat offset by the suspension of operations at Samarco in November 2015.
  • Investors should note that WAIO’s strong performance more than offset the one-off occurrences. These include a train derailment and a power outage at the port in the December 2015 quarter, as well as adverse weather conditions in the March 2016 quarter.
  • As expected, iron ore production in Samarco, Brazil, was just 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. The company stated that the final shipment of pellets from stockpiles was settled in the June 2016 quarter.

Guidance

BHP guided for the WAIO production to remain between 265 million–275 million tons (on a 100% basis) for fiscal 2017. Investors should note that BHP finished fiscal 2016 with a run rate of 275 million tons per year for the quarter ended June 2016. This should place it well to hit the guidance of 265 million–275 million tons for fiscal 2017.

Iron ore production in fiscal 2017 is expected to be back end–weighted as new primary crusher and additional conveyor capacity is expected to be finished in the December 2016 quarter.

The company maintained the long-term capacity guidance to increase to 290 million tons per year in fiscal 2019.

Meanwhile, Rio Tinto (RIO) announced its production results for the quarter ended June 30 on July 19, 2016, and maintained its guidance of 330 million tons (on a 100% basis) of global shipments for 2016. Vale SA (VALE) and Cliffs Natural Resources (CLF) will release their 2Q16 results on July 28.

Cliffs Natural Resources 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 coal production in fiscal 2016.

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