Shares in eternal favourite BHP Group Limited [ASX:BHP] have fallen gradually after today’s market open, and are currently sitting at $38.36 a share, down 0.34%.
The iron ore conglomerate has faced a ‘reasonably mixed’ third quarter so far, with the added bonus of warnings from global bank UBS that the current coal price is not sustainable.
Iron ore rally ‘not sustainable’ in the long term
A bearish broker note has been issued by UBS, downgrading BHP’s value from a buy to a ‘neutral’ rating.
The Sydney Morning Herald this morning noted that shares in BHP are at the lowest they’ve been in 17 sessions, in contrast to previous weeks which has seen the share price climb on the back of closures in Brazil, affecting a number of miners in the region.
The closures, due to a series of dam failures, had the capacity to hamper many of the mines in the Minas Gerais state region back in January. Trading ports in Western Australia have also been adversely affected by Cyclone Veronica.
With their main rival Vale reopening the Brucutu iron ore mine, it looks like BHP will really start to feel the effect of competition once global supply levels start to lift and the brief surge in iron ore prices finally comes to an end.
It’s expected that Vale will bring roughly 30 million tonnes back into the market.
As for BHP, their third quarter results were largely flat, and included a decrease in iron ore production (down 3%). Final quarter guidance for iron ore has also been relegated to between 265–270Mt, thanks to the adverse conditions.
Is BHP shares a buy?
While UBS has cooled on the price of ore and metallurgical coal for the next 6–12 months, not everyone appears so bearish. Macquarie’s latest analysis is to keep BHP at a high — likely as a reaction to BHP’s prime position should they be affected by increases in price.
Despite the setbacks, BHP remains in vogue as a result of their strong balance sheet and high cashflow generation.
BHP’s Chief Executive, Andrew MacKenzie has consistently highlighted their high expectations for the future outside of iron ore exploration:
‘During the March 2019 quarter, we had a strong operational performance despite weather impacts across Australia and Chile. We approved Atlantis Phase 3 and now have five major projects under development. Those projects, our work on transformation, technology and culture, and our successful petroleum and copper exploration and appraisal programs will grow value and returns for years to come.’
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