BHP: Solid Production and Two Metallurgical Coal Mines to Be Sold to Whitehaven Coal

We maintain our fair value estimate for no-moat BHP BHP of AUD 41 per share as fiscal 2024 first-quarter sales met our expectations. BHP also reiterates fiscal 2024 guidance. BHP’s share of sales from its Western Australia iron ore operations, the main driver of its earnings, was 64 million metric tons, up modestly on the previous quarter and the same period last year. BHP’s WAIO business is on track to meet our unchanged forecast for fiscal 2024 of roughly 255 million metric tons, its share, around 3% higher than last year. An average price of USD 98 per metric ton was modestly lower than our forecast for fiscal 2024 of about USD 102, but futures prices are higher. We continue to forecast WAIO unit cash costs of around USD 18 to USD 19 per metric ton for fiscal 2024. BHP’s iron ore business accounts for about 60% of our forecast fiscal 2024 EBITDA of roughly USD 30 billion.

BHP and Mitsubishi have agreed to sell their interests in the Daunia and Blackwater metallurgical coal mines in Queensland, which they own in a 50/50 joint venture, to Whitehaven Coal for USD 3.2 billion (AUD 5 billion) on a 100% basis. Additional proceeds of up to USD 900 million (AUD 1.4 billion) are payable by Whitehaven, depending on metallurgical coal prices for the three years after the deal closes. The deal is set to close in the June quarter of fiscal 2024. Daunia and Blackwater account for roughly a quarter of BHP’s metallurgical coal production, but with BHP’s metallurgical coal division representing roughly 10% of our fair value estimate, the sale is immaterial to BHP.

As for Whitehaven, our initial thoughts are that it has agreed to pay a reasonable price for these mines and the debt to be taken on is manageable. The purchase will also diversify its production to roughly 50% metallurgical coal and 50% thermal coal from mostly thermal coal now. We will review the transaction in more detail and update our fair value estimate for Whitehaven soon.