BHP Sees Price Improvement in Fiscal First Quarter, But Faces Staggering Challenges from Past Year

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Researched by Industrial Info Resources (Sugar Land, Texas)--A historic mining disaster in Brazil, a massive power blackout in Australia and persistently low commodity prices are the three biggest problems facing BHP Billiton plc (NYSE:BHP) (Melbourne, Australia), one of the world's top mining firms, as it begins its 2017 fiscal year. But the company maintains a positive outlook on global mining conditions, after meeting fiscal first-quarter expectations and benefiting from stronger iron ore and coking coal prices. Industrial Info is tracking $15 billion in active projects involving BHP.

"We have seen early signs of markets rebalancing," said Andrew Mackenzie, BHP's chief executive office, in BHP's first-quarter production report, released earlier this week. "The combination of steadier markets, continued capital discipline, improved productivity and increased volumes in copper, iron ore and metallurgical coal should further support strong free cash flow generation this financial year."

He added: "Fundamentals suggest both oil and gas markets will improve over the next 12 to 18 months. Iron ore and metallurgical coal prices have been stronger than expected, although we continue to expect supply to grow more quickly than demand in the near term."

Executives said BHP is on track to meet its fiscal 2017 production guidance of 265 million to 275 million tonnes of iron ore, the company's bread and butter, compared with 257 million tonnes last year. Copper production is expected to reach 1.66 million tonnes, although it could be negatively affected by a power blackout in South Australia, while petroleum production is expected to be between 200 million and 210 million barrels of oil equivalent.

Chairman Jac Nasser announced at BHP's recent Annual General Meeting that he planned to step down from his role at BHP, which he took in 2010 at the height of a boom in commodity prices. Since then, prices have plunged and the world's leading mining firms have dramatically slashed capital spending and employment. Nasser said he would not seek re-election at next year's annual general meeting.

The past year has been particularly rocky for BHP. In February, BHP chalked up a $5.67 billion loss for the previous six months, partly because of a massive write-down of its U.S. energy assets; six months later, BHP recorded a net loss of $6.39 billion, its worst fiscal-year loss since it was formed in 2001. Price weaknesses in North America alone had accounted for $4.9 billion in write-downs and charges.

But the worst of the company's problems began in November 2015, with a mining disaster in Brazil that has been called the worst in that nation's history. A dam at the Samarco mine burst, killing 19 people and causing irreparable harm to farm land and nearby towns, including two that were basically destroyed outright. BHP operates the Samarco joint venture with Brazilian iron-ore giant Vale S.A. (NYSE:VALE) (Rio de Janeiro, Brazil).

According to The Wall Street Journal, Brazilian federal prosecutors filed homicide charges yesterday against 21 people in connection with Samarco, including current and former officials from BHP, Vale and the Samarco joint venture.

Nasser said that the "basic structure of the Samarco response is in place." However, BHP admitted just last week that it cannot guarantee that the mine will be reopened. Representatives told The Telegraph that Samarco would need to be economically viable to justify a restart, and therefore its future is "not assured." Two planned maintenance programs for crusher plants at the Samarco iron-ore mine, each valued at $1 million, have been delayed indefinitely as a result. For more information, including affected capacity and environmental and equipment requirements, see Industrial Info's project reports on crusher plants No. 1 and No. 2.

Just recently, a massive power outage at BHP's Olympic Dam in Roxby Downs, South Australia, put a 26% dent in the mine's production and led to its copper division falling short of expectations. Representatives have said that power has since been restored at the dam and operations are expected to be fully ramped-up in the coming quarter, but an ongoing guidance review means Olympic Dam's production target for the year will likely be lowered, according to Australia's Financial Review.

Industrial Info is tracking a $61.16 million rebuild of a smelter flash furnace at the Olympic Dam, which involves shutting down and overhauling the 85,000-ton-per-year Outokumpu furnace. The project is scheduled to kick off in August 2017; currently, it is not known if the blackout will lead to a delay. For more information, see Industrial Info's project report.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.