Home / Commodities / Commodity News / Fitch Affirms BHP at ‘A’; Outlook Stable

Fitch Affirms BHP at ‘A’; Outlook Stable

Fitch Ratings has affirmed BHP Group Limited’s (BHP) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at ‘A’. The Outlook on the Long-Term IDR is Stable.
BHP’s rating is reflective of the company’s large scale, strong business profile with balanced commodity exposure mid-cycle, and strong margins linked to favourable cost positions.

The rating also reflects BHP’s strong financial profile and operational performance. The reporting period to end-June 2022 (FY22) was a record year for BHP on the back of strong pricing for its key commodities: copper, iron ore and metallurgical coal leading to robust cash flow generation and EBITDA net leverage of -0.1x. We forecast EBITDA net leverage to remain low despite an expected increase to 0.5x by FY26 based on our commodities price assumptions and rising capex.

KEY RATING DRIVERS
Earnings Moderating in FY23: Fitch forecasts EBITDA of USD26 billion for FY23 (USD39 billion in FY22), normalising to around USD16 billion by FY26 based on Fitch’s conservative price assumptions. Completion of Oz Minerals (OM) acquisition for AUD9.6 billion coupled with expected USD13.4 billion shareholders distribution will drive increase in EBITDA net leverage to 0.2x in FY23 from -0.1x in FY22. Fitch expects neutral to slightly negative FCF (after dividends) from FY23 due to higher capex intensity and shareholders distributions at 50% payout ratio. We forecast EBITDA net leverage to remain conservative at well below 1.0x despite a gradual and moderate increase by FY26.

China’s Reopening Provides Support: China’s reversal of its zero-COVID policy in December has boosted sentiment and led to a rebound in commodity prices so far this year, yet uncertainty remains on the sustainability and duration of the rally. The copper market is tightly balanced with strong medium to long term perspectives due to demand in energy transition. China’s re-opening also provides a short-term upside for demand. Iron ore supply and demand remain quite balanced in 2023. China is reducing steel production incrementally, but there is stronger demand in Europe and North America. Metallurgical coal market is supported by improving demand prospects after China re-opened and lifted its ban on imports from Australia.

Organic Growth Options: Fitch believes that organic growth will remain BHP’s primary expansion option in the medium term. BHP has a broad portfolio of scalable assets such as Escondinda (copper), Jansen (potash – currently under construction) and Western Australia Iron Ore where the company is conducting additional studies and can expand projects with the benefit of having existing infrastructure in place. Organic contribution can also be delivered from other copper and nickel projects in Australia whilst Fitch assumes no expansion in metallurgical coal assets.

Complementary Acquisition: Proposed takeover of OM provides BHP with opportunities for integration with its Australian assets such as Oak Dam, Olympic and Nickel West as well as extends its presence in Brazil. Fitch expects that BHP will also benefit from target’s pipeline of expansion projects despite modest contribution to current production. Including nickel production, OM plans to more than double its output in the next five years from 124 thousand tonnes of copper and 211 thousand ounces of gold in 2022. Acquisition is pending OM’s shareholder approval and is expected to close in April 2023.

Strong Operational Profile: BHP has meaningful economies of scale, with assets placed in the first, second (iron ore) and third (copper) quartile of the relevant business cost curves and proximity to important end-markets, particularly Asia and North America. BHP’s portfolio has lower product concentration than key peers Vale and Rio Tinto. Fitch believes BHP is comfortably placed within the ‘A’ rating category from an operational perspective and benefit of diversification is expected to expand as by 2030 BHP plans to have half of its asset portfolio dedicated to production of copper, potash and zinc.

Supportive Capital Allocation Framework: BHP distributes operating cash flow in accordance with the following priorities: i) maintenance capex; ii) to preserve a strong balance sheet with target net debt of USD5 billion-USD15 billion (company’s definition); and iii) a minimum 50% pay-out ratio for dividends. Any residual cash flow is used to retain financial flexibility, for shareholder distributions and growth spending. The process is transparent and together with the communication of medium-term priorities, provides sound guidance for financial profile analysis.

We assume limited scope for shareholders distributions above the minimum payout ratio based on Fitch’s conservative price deck and the company’s medium-term capex guidance of USD10 billion. We expect BHP to maintain net debt in Capital Allocation Framework’s target range and adjust expansionary capex in order not to exceed its net debt upper boundary of USD15 billion.

Decarbonization Progress: BHP plans to spend USD4 billion on operational decarbonization by 2030 and targets to reduce scope 1 and 2 emissions by at least 30% by 2030 and become carbon neutral by 2050. Fitch expects BHP to gradually progress towards 2030 goal as switching to renewable power source for Escondida and Pampa Norte in FY22 reduced BHP’s scope 1 and 2 emissions by 25% compared to FY21 and progress is being made on decarbonization of energy sources for Nickel West, Olympic Dam and BMA in Australia.

BHP’s efforts around scope 3 are concentrated on support for steelmakers to reduce emission intensity by 30% and support for 40% reduction in emissions of BHP chartered vessels.

Divestments in Coal, Oil Continue: As part of its longer-term decarbonization strategy BHP has also been shifting its portfolio away from commodities which do not contribute to the energy transition. The group sold its stake in BHP Mitsui Coal (BMC) and also exited its petroleum business through an all-stock merger with Woodside Energy Group in 2022. BHP has announced it is looking to divest more of its lower grade metallurgical coal assets this year but will retain other higher-grade coal assets for the foreseeable future.

Fitch estimates that Blackwater and Daunia coal assets contribute low single digits to BHP’s EBITDA and their disposal will be neutral for the credit profile.

DERIVATION SUMMARY
BHP is one of the top-three global mining companies. Close peers include Rio Tinto (A/Stable) and Vale S.A. (BBB/Stable). BHP derives an estimated two thirds of mid-cycle EBITDA from steelmaking raw materials (mainly iron ore, but also metallurgical coal) and around on third from copper. In 2022 BHP divested its remaining oil and gas portfolio, which followed the disposal of U.S. onshore shale assets in recent years. BHP remains a large, diversified mining company with well-balanced commodity exposure and incrementally stronger business profile among the peer group.

Rio Tinto derives around 70% of mid-cycle EBITDA from iron ore (including the Canadian pellets business), 15% from the aluminium business, 12% from copper and 3% from other minerals over the medium term. BHP and Rio Tinto have similar financial profiles, with EBITDA gross leverage below 1.5x and EBITDA net leverage at or below 1.0x over the medium term. We expect both companies to scale back shareholder returns and safeguard strong balance sheet when commodity prices fall. BHP and Rio Tinto derive a large majority of earnings from assets in OECD countries.

In comparison, Vale S.A. has historically derived more than 85% of EBITDA from iron ore (including pellets) with the remainder from nickel, copper and other minerals. The company has a lower rating than its peers due to i) concentrated exposure to one commodity – iron ore; ii) the majority of operations being located in Brazil, which has a less developed economic environment and systemic governance; iii) higher transportation costs to important markets like China; and iv) a history of weak governance in observing robust safety practices, as shown by the Mariana and Brumadinho dam failures.

At the same time, Vale has low leverage and strong FCF after dividends (on a par or slightly better than Rio Tinto and BHP), which positions it well to withstand changing commodity market conditions through the cycle or unexpected legal liabilities that relate to the Brumadinho dam failure.

KEY ASSUMPTIONS

  • Commodities price assumptions in line with Fitch’s price decks;
  • Production output in the middle of the range of management guidance;
  • Capex of USD7.6 billion in FY23 (management guidance), USD8.5 billion in FY24 and FY25 (Fitch assumption);
  • Future dividends to reflect the 50% pay-out ratio with no additional distributions so that net debt remains with the guided range of USD5 billion – USD15 billion;

USD6.6 billion for the acquisition of OM to be completed by the end of FY23.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

–An upgrade could result from a further strengthening of the company’s mining operating profile or diversification into other sectors with lower business risk and correlation of earnings with its mining operations.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

–EBITDA net leverage above 1x on a sustained basis

–EBITDA gross leverage above 1.5x for a sustained period;

–Sizeable debt-funded dividends or share buybacks leading to deterioration of the financial profile.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.

LIQUIDITY AND DEBT STRUCTURE

Robust Liquidity: BHP continues to hold a robust liquidity position with USD9.6 billion in cash and cash equivalents as at Dec. 31, 2022. The company has generated strong FCF in recent years although we expect neutral to slightly negative FCF in line with an easing of commodity prices from FY23.
BHP has an undrawn USD5.5 billion revolving credit facility, with a maturity in October 2026, while in February 2023 it also entered into a fully underwritten USD5 billion new loan facility, which is available to be drawn down to support the upcoming acquisition of OM. In comparison, maturities over the coming year to June 2024 amount to around USD3.7 billion. BHP completed the repurchase of its hybrid bond programme throughout 2021.

ISSUER PROFILE

BHP is the largest global mining company by revenues with a balanced portfolio of iron ore, copper and coal assets.

SUMMARY OF FINANCIAL ADJUSTMENTS
–USD2,576 million leases were excluded from the total debt amount; USD975 million of depreciation and USD119 million of interest for leasing contracts were treated as operating expenditure, reducing EBITDA;

–Debt was increased by USD1,548 million linked to foreign exchange derivates and decreased by USD14 million linked to interest rate derivatives, both hedging net debt;

–USD127 million of cash that is restricted by legal or contractual arrangements is excluded from “cash and cash equivalents” as calculated by Fitch.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
Source: Fitch Ratings

Recent Videos

Hellenic Shipping News Worldwide Online Daily Newspaper on Hellenic and International Shipping