BREAKINGVIEWS-BHP's copper dreams get a glimpse at reality

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Antony Currie

SYDNEY, Feb 18 (Reuters Breakingviews) - BHP BHP.AX boss Mike Henry is a little bit too keen to express his preference for organic growth over M&A. Granted, on the surface results for the six months to the end of December show the $130 billion miner achieving on its own one of the key goals of last year's failed attempt to buy Anglo American AAL.L: reducing its dependence on iron ore. But that success is not as simple as it looks.

That's not to dismiss what Henry has achieved. In the second half of last year, copper accounted for almost 40% of the Australian company's EBITDA, up from 25% in the same period the previous year. In part that's thanks to the red metal's output increasing by a tenth over that time frame - and by more than double that since 2022. Production costs at its key Escondida mine in Chile also fell 12% in a year.

But relative price moves played a big role, too. BHP on average got 10% more for the copper it dug up compared to the second half of 2023. It raked in more than a fifth less, though, for its iron ore.

That was driven by concerns over the economy in China, which buys most of the steelmaking ingredient that BHP mines. Henry's team is relatively bullish about the People's Republic and expects Beijing's efforts to boost domestic consumption will keep GDP growth in the world's second-largest economy in the 4.5% to 5% range. If they're right, the iron ore price ought to recover, bolstering its share of the company's profit.

A deal, whether for a copper giant like Anglo or a standalone player like Freeport-McMoRan FCX.N, would quickly supercharge BHP's diversification. Trouble is, its stock has dropped some 11% in the past year, while that of Anglo is 40% higher. The resulting widening valuation gap makes it virtually impossible for Henry, who has held fast to his pledge not to overpay for assets, to start a new merger dance.

At least he and his shareholders have some organic growth to fall back on - even if that's a slower path to realising BHP's copper dreams.

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CONTEXT NEWS

BHP on February 18 reported net profit of $4.4 billion for the six months to the end of December. Results included $700 million in provisions for its settlement over a 2015 dam failure in Brazil and its decision last year to suspend its nickel operations in Western Australia.

The mining company said it would pay a dividend for the six months of 50 cents a share. At $2.5 billion, it equates to a 50% payout of underlying earnings, the minimum amount BHP has pledged to pay.

Shares were up slightly in midday trading on the ASX, while the broader market was down 0.6%.