DBRS Upgrades BHP Group Ltd. & BHP Group plc to “A” and Changes Trend to Stable

DBRS Limited (DBRS) upgraded the Issuer Rating of BHP Group Ltd. & BHP Group plc (collectively, BHP or the Company) to “A” and changed the trend to Stable from Positive as a result of the Company’s improved business risk profile and mix following the sale of its U.S. Onshore unconventional petroleum assets and its improved financial risk profile. The U.S. Onshore asset sale, completed in October, 2018, caused BHP to become a smaller petroleum industry player, and as a result, its expected future economic contribution falls below the threshold for evaluating the Company using the oil & gas methodology, thereby reducing a drag on its business risk profile. That said, although the sale proceeds were not used to acquire replacement assets, BHP remains the largest mining company in the world by market capitalization and assets and has an attractive portfolio of long-life, low-cost operations that should provide attractive cash flow over the next few years at forecast commodity prices. Additionally, the completion of the new desalination facility in Chile to supply the Escondida operations and the start-up of the Los Colorados concentrator allow for higher throughput tonnages to offset a declining copper grade profile. Escondida is now positioned for another 50 years of operation with a significant reduction in local water extraction, ceasing extraction from one of the main aquifers, Salar de Punta Negra in 2018 and reducing extraction from the Monturaqui wellfield by 54% from F2020, and moving BHP closer to its goal of zero groundwater extractions at Escondida by 2030. Finally, the development of the South Flank iron ore mine as a long-term replacement for the depleting Yandi mine is an excellent example of a relatively low-cost brownfield replacement project with high returns. The South Flank mine should also provide approximately 1% higher iron ore grades as well as a higher proportion of lump ore that sells at a premium to sinter fines.

During F2018, BHP generated 19% higher EBITDA compared with F2017, due mainly to materially higher contributions from the Copper and Coal segments. Further, BHP reduced its gross debt by $3.7 billion during F2018. These, among other things, caused BHP’s financial risk profile for F2018 to strengthen compared with F2017. For F2019, DBRS expects the Company’s key credit metrics to remain commensurate with the current rating despite lower Bloomberg consensus commodity price forecasts (as of December 5, 2018), especially for copper and iron ore. DBRS expects that F2019 EBITDA should improve moderately to the $23.6 billion to $23.8 billion range compared with $23.3 billion in F2018. Cash flow from operations is expected to decline moderately to the $17.5 billion to $17.7 billion range compared with $18.7 billion in F2018, mainly due to other items, including discontinued operations, dividends and interest received. DBRS’s expectations assume that the Company’s 50%-owned Samarco operations will not restart in F2019, but the situation is being monitored.

DBRS views BHP’s liquidity as strong, with $15.9 billion in cash and $6.0 billion in availability under the Company’s credit facility at the end of F2018, which should be sufficient to fund any cash flow deficits and potentially allow further debt tenders. DBRS does not expect a positive rating action in the medium term based on BHP’s current business risk profile and current financial forecasts. However, DBRS estimates that, among other things, either a decline to 25% below current consensus forecasts or the purchase of non-accretive assets would be necessary before a negative rating action could be warranted.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Mining Industry (September 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

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