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BHP Shares Sink – Here’s Why It’s Disappointing

BHP Group Ltd (ASX: BHP) shares fell 2% today after it released its report covering activities for the nine months ended 31st March 2019.

BHP Group Ltd (ASX: BHP) shares fell 2% today after it released its report covering activities for the nine months ended 31st March 2019. Here’s what you need to know.

About BHP

BHP is a world-leading resources company, extracting and processing minerals (like iron ore and copper), oil and gas, and has more than 62,000 employees and contractors, primarily in Australia and the Americas. Headquartered in Melbourne, BHP has shares listed on both the ASX and London Stock Exchange (BHP Billiton Plc).

The 5 Key Points:

  • FY19 production guidance has been decreased for iron ore to 265-270 Mt
  • Production guidance remains unchanged for petroleum, copper, metallurgical coal and energy coal
  • The Atlantis Phase 3 Project in the US Gulf of Mexico was approved
  • Unit costs for Western Australian Iron Ore are expected to be below US$15 per tonne
  • All major projects under development are tracking to plan

Iron Ore Production Lower

BHP’s FY19 iron ore production guidance was cut, reflecting the impacts of Tropical Cyclone Veronica. The total impact from the cyclone is estimated to be between 6-8Mt.

As a result, unit costs are now estimated to be below $15 per tonne, an increase from previous estimates of below $14 per tonne.

Compared to the nine months ended 31st March 2018, iron ore, energy coal, metallurgical coal and petroleum production were all unchanged, while copper production fell 3%.

Management Commentary

BHP CEO Andrew Mackenzie described the result as strong despite the weather impacts.

“During the March 2019 quarter, we had a strong operational performance despite weather impacts across Australia and Chile”, he said.

“We approved Atlantis Phase 3 and now have five major projects under development.

“Those projects, our work on transformation, technology and culture, and our successful petroleum and copper exploration and appraisal programs will grow value and returns for years to come”, he said.

What’s Next?

Reduced iron ore production was expected following Tropical Cyclone Veronica and has impacted most iron ore producers, including Rio Tinto Ltd (ASX: RIO) and Fortescue Metals Group Ltd (ASX: FMG).

Although production will be lower this year, BHP has benefitted from higher iron prices. If prices remain high, the impact of lower production may be dampened. On the other hand, falling prices could make the issue much bigger.

The uncertainty around iron ore prices turns me away from investing in a business like BHP. They rely quite heavily on commodity prices to retain profit margins. If you’re looking for proven growth shares that don’t rely on commodity prices, check out the free report below for ideas.

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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.

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