BHP Billiton cuts iron ore production guidance in wake of Samarco

BHP Billiton maintained full year guidance for oil, copper and coal but iron ore production is expected to be reduced by 10m tonnes due to the dam disaster at Brazil's Samarco.

The Anglo-Australian miner's underlying half-year profits will be hit by charges of between US$300m and US$450m due to redundancy costs, operational closures, inventory write-downs stemming from weaker commodity prices, and taxation matters. At this stage, the estimated costs related to Samarco cannot be accurately estimated.

Earlier this week, the company revealed it would take an impairment charge of roughly US$4.9bn post-tax, or US$7.2bn pre-tax, on its onshore US assets.

Another change that was largely expected was that onshore US drilling and development expenditure for the half year was less than half the previous half-year, at roughly US$850m.

Overall for the first half of the year, petroleum was down 5% on the prior half-year at 125m barrels of oil equivalent (MMboe), copper down 6% at 762 kilotons, iron ore up 4% to 118m tonnes, and metallurgical and energy coal both down 3% to 21Mt and 19Mt respectively.

For the full year guidance is for 1.5Mt copper, metallurgical and energy coal of 40Mt each and 237MMboe petroleum.

BHP said its four major projects under development were going according to plan, including the North West Shelf Greater Western Flank-A oil and gas joint venture project off the north-west coast of Western Australia being completed under budget and ahead of schedule, while the Greater Western Flank-B project was also approved during the period.

Following a reduction in investment to preserve the value of its petroleum assets in the low-price environment, the strong performance of conventional petroleum assets offset lower shale volumes, chief executive Andrew Mackenzie said.

"Commodity prices fell substantially in the first half of the 2016 financial year putting pressure on the whole resources sector," he added.

"We continue to cut costs and remain focused on safely improving our operational performance to enhance the resilience of our business. In this environment, we are also committed to protecting our strong balance sheet so we have the financial flexibility to manage further volatility and take advantage of the expected recovery in copper and oil over the medium term."

Analysts at Societe Generale said production was better than it expected in the second quarter but warned that if management could stick to current dividend payout policy they will risk a credit rating downgrade;

Broker Shore Capital said the first-half production was essentially in-line with expectations and it would not be surprised should BHP announce additional capex cuts during its H1 FY2016 financials, with Mackenzie and chairman Jac Nasser having often emphasised the importance of protecting the balance sheet.

"We have taken this has BHP hinting that the sacred cow that was its progressive dividend policy could be sacrificed should this prove necessary to ensure survival during a worsening commodities famine."