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The Big Australian and iron ore prices

1 Jun 2021 3 month(s) ago

BHP’s earnings are soaring but can it last?

Investing with your own super money usually means assessing the future of Australian blue chip companies: their dividend prospects, their future earnings trajectory, the likely price target. One of the biggest companies on the ASX is the Big Australian, BHP, which is doing well. But will it continue?

Macquarie says the spike in iron ore prices will provide BHP with record six monthly earnings. “The spike in spot iron-ore prices is set to enable BHP to report a record second half financial year 21 result with our 2HFY21 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) forecast of US$20.1 billion set to exceed the second half financial year of 2011 record of US$19.8 billion. We note that underlying earnings before interest and tax (EBIT) is expected to match the 2HFY11 record. ?

“Assuming spot prices remain at current levels for the remainder of the 4QFY21, we expect BHP to report underlying Ebitda and Ebit of US$23.3 billion and US$20.3 billion in the 2HFY21. Both underlying Ebitda and Ebit would beat the previous record for a half for BHP by 18%.”

The good times depend on iron ore prices continuing, which in turn heavily depends on what China does. Recent developments in other industry sectors have not been encouraging; China has started a full on trade war with Australia.

Still, Macquarie has a 12 month price target of $57, although its 2022 estimation is for earnings per share to contract by 13.6%. Investors may get some promising dividend yields, although it could be temporary. Macquarie’s estimated 2022 dividend yield is 5.8%, but falling to 4.4% for 2023 (fully franked).

Shaw Stockbroking has a buy recommendation on BHP and a price target of $56.00

Morgan Stanley is expecting China to engineer a fall in iron ore prices. “A strong rally in iron ore on the back of China's high steel production rates and tensions with Australia ultimately caught the attention of the State Council, which deemed commodity price increases 'unreasonable', while Dalian raised margin requirements, bringing iron ore back to $200/tonne.”

Coal, which is also important for BHP, is looking strong, according to Morgan Stanley. “Met-coal, though, gained $10/t fob Australia as strong China demand for spot coal from North America spilled over into demand from elsewhere for Australian coal. Thermal coal held firm, close to $100/t on demand strength.”

Credit Suisse notes that construction accounts for 60% of China’s steel use, and over 80% if machinery is added. “Out iron ore price forecasts for January were base on the premise for firm demand for property and infrastructure in the first half and potentially fading in the second half. But we missed the strength of manufacturing recovering from the end of the Trump trade war. We now expect manufacturing to support construction in the second half.”

CS says the steel price determines the iron ore price. If that comes off, iron ore prices will also ease. “We expect it should soften to $US150-160/tonne.”

Reader note: These is general reporting only and should not be considered in any way to be investment or tax advice. For more information please read our disclosure statement.

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