Last updated: July 17, 2013 8:05 am

Strong iron ore showing boosts BHP

BHP Billiton iron ore mine©Bloomberg

BHP Billiton, the world’s biggest resources company by market value, enjoyed a strong finish to its financial year with production at two of its largest divisions surpassing market expectations in the latest quarter.

Production from BHP’s most profitable business, its iron ore operations in Western Australia, hit 45m tonnes in the three months to June, up from 37.6m tonnes in the previous quarter and ahead of analyst forecasts, BHP said in a production update on Wednesday.

Copper production rose 8.5 per cent to 333,200 tonnes in the quarter, which also topped market expectations.

Shares in BHP, which have fallen 10 per cent in the year to date, rose 2.3 per cent to A$34.19 on the Australian Securities Exchange.

“A solid result, in our view, with production beats across all key commodities. We believe this result highlights BHP’s current focus on increasing asset productivity is beginning to deliver meaningful results,” said Craig Sainsbury, Goldman Sachs analyst.

Traders said the only blemish in the report was the performance of BHP’s petroleum business, where production in the June quarter reached 59m barrels of oil equivalent.

That meant total petroleum production over the financial year to June increased 6 per cent to 236m boe – 4m barrels short of company guidance. BHP blamed the miss on extended maintenance and drilling delays at its non-operated assets in the Gulf of Mexico.

There was better news from the company’s onshore operations in the US, where production reached 99m boe in the year to June. BHP entered the booming US unconventional oil and gas market in 2011 with the purchase of shale gas assets worth $20bn.

“Drilling and development expenditure was $4.8bn in US onshore, ahead of expectations ($4bn),” said UBS analyst Glyn Lawcock. “But better well productivity sees [BHP’s] 2014 budget under review.”

BHP said the Jimblebar mine expansion, which will lift annual production capacity at its Australian iron ore business to 220m tonnes, was expected to achieve “first” output ahead of schedule in the December quarter. The company set its global 2014 production guidance at 207m tonnes.

BHP and rivals Rio Tinto and Fortescue Metals Group are all pushing ahead with plans to increase production of the steelmaking ingredient from their mines in the Pilbara region of Western Australia.

As a result, the seaborne iron ore market is expected to move into surplus over the course of 2013. If combined with falling Chinese steel production, analysts say, that could trigger another rout in the iron ore price, which sank to $86 a tonne in August 2012. It is currently trading at $129 a tonne.

Rio Tinto on Tuesday said iron ore output from its Pilbara operations rose 7 per cent from the previous quarter to 62m tonnes in the three months through June, and affirmed its 2013 global production guidance of 265m tonnes.

In response to tougher market conditions and uncertainty over demand from China, BHP’s chief executive Andrew Mackenzie has promised to cut billions of dollars from the company’s spending and focus on labour productivity.

Spending on new and existing operations is set to fall from $22bn this year to $18bn in the next financial year, and to $15bn or less within two years. The company has mothballed a planned $20bn iron ore port in Port Hedland, Western Australia, in favour of expanding its existing inner harbour facilities.

BHP will announce annual results on August 20. Analysts expect net profit after tax of about $12.5bn for the year to June, down from $17.1bn last year.

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