Assessing BHP Billiton’s Iron Ore Production Target in 1Q16

Iron ore volumes

Iron ore volumes are key to BHP Billiton’s (BHP) (BBL) iron ore segment’s revenue. In the current scenario of oversupply and weaker demand, big iron ore companies maintain a strategy of increasing their volumes in order to reduce the pressure on revenues, cash flows, and ultimately the bottom line. In this part of our series on BHP Billiton’s strong numbers in 1Q16, we’ll see how BHP has been working to increase its iron ore volumes.

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Strong iron ore volumes

BHP Billiton’s iron ore production for 1Q16 was 61 million tons, a growth of 7% year-over-year. Below is a production breakdown:

• WAIO (Western Australia Iron Ore), BHP’s main iron ore asset, produced a record 67 million tons (on a 100% basis) due to the ramp-up of the Jimblebar mining hub and improved iron ore handling plant utilization at Newman.
• Iron ore production in Samarco, Brazil, increased by 9% on YoY (year-over-year) basis, reaching 7.5 million tons on a 100% basis.
• Samarco’s fourth pellet plant reached full capacity during BHP’s March 2015 quarter, which greatly helped the company’s strong overall production performance.

Unchanged forward expectations

BHP management has kept its expectation unchanged. It plans its total production to increase by 6% in fiscal 2016—to 247 million tons—driven by improved efficiency at Mining Area C, Newman, and rail and port operations. Meanwhile, the company has underpinned productivity as the only source of volume growth at WAIO in fiscal 2016. This should contribute to BHP’s iron ore production target of 290 million tons per year over time.

Meanwhile, RioTinto (RIO), a company that believes that iron ore is in a relatively balanced position, released its 3Q15 production overview on October 15.  Vale SA (VALE) also released its production highlights on October 19, whereas Cliffs Natural Resources (CLF) released its 3Q15 results on October 29.

Notably, Cliffs Natural Resources is experiencing lower iron ore shipments due to lower export volumes and lower demand from steelmakers in the United States (SPY) (IVV). Rio Tinto and BHP Billiton make up 1.7% and 5.0%, respectively, of the SPDR S&P Natural Resources ETF (GNR). Vale forms 2.9% of the iShares MSCI Brazil Capped ETF (EWZ).

Continue to the next part of this series for a discussion of BHP Billiton’s declining coal production in 1Q16.

• [Editor:Yueleilei]