MELBOURNE (Reuters Breakingviews) – Mike Henry can celebrate an unexpectedly happy anniversary. He became chief executive of Australian mining giant BHP just in time for Covid-19. Higher iron ore prices driven by Chinese demand, however, have just helped pay for a record $5.1 billion dividend. They also buy him extra time to grapple with difficult strategic decisions.
The smooth leadership transition last year quickly took a rocky turn. Bracing for a global economic slowdown and keeping workers safe from the virus became more pressing than operational efficiency or expansion. Along with $6 billion of underlying profit for the six months to Dec. 31 unveiled on Tuesday came $440 million of pandemic-related costs.
China’s quick rebound helped ease Henry’s plight. Construction stimulus combined with hobbled Brazilian supplies drove up the price of iron ore. For BHP, every extra $1 per tonne on the market price of the steelmaking ingredient equals some $240 million of EBITDA. And the average price realised was almost $104 for the six-month stretch, a full 33% higher than a year earlier, more than making up for lower oil and coal prices.
There’s probably more to come. BHP expects China to churn out 1 billion tonnes of steel in 2021 for a third consecutive year, and iron ore is selling at more than $160. With the rest of the world also recovering, governments and companies could take advantage of ultra-low interest rates to invest. Henry even considers the transition from fossil fuel to renewable energy an opportunity to sell more iron ore despite the harmful impact it will have on his company longer term.
These trends, and the hefty payouts they enable, have given Henry wiggle room to consider a hefty investment into the Jansen potash project. The abundant cash could make it an easier sell to shareholders. He can also delay buying copper and nickel assets, which are inflated. And it means the sticky question of BHP’s dual-listing structure can stay on the back burner for longer. Moreover, there’s less intense pressure to find new customers following Beijing’s ban on Australian coal, which is likely to stay in place for some time. In that sense, Henry will get an extended honeymoon.
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