Shares of BHP (ASX:BHP) Group Ltd (ASX: BHP) are seeing a downturn on Monday, with the mining giant’s stock trading at $40.70. This decline comes amid broader market activity, where the ASX 200 index is experiencing a modest increase of 0.7%, reaching 7,834.6 points.
What’s Driving the Decline in BHP Shares?
The recent dip in BHP's share price, an ASX mining stock, is largely driven by concerns over a potential strike at its Escondida operations in Chile. Escondida is notable as the world’s largest copper mine, and the uncertainty surrounding labor negotiations there is weighing on investor sentiment.
Earlier this month, reports indicated that workers at Escondida had rejected a proposed collective bargaining agreement. The rejection raises the possibility of a strike, which could significantly disrupt operations. BHP has until today to finalize an agreement with the union to avoid a strike. However, if an agreement is not reached, the union has the option to legally initiate strike action. Mediation efforts could extend the deadline by up to five additional days, potentially delaying any industrial action.
Increased Risk of Industrial Action
The risk of a strike appears to be growing, influenced by several factors, including cost-of-living pressures and inflation. This risk is compounded by the current dynamics in the Chilean copper mining industry. With inflationary pressures mounting, coupled with rising copper prices and a tight labor market, the potential for industrial action is elevated.
In recent negotiations, BHP successfully reached agreements with Sindicato No.2, one of the labor unions at its operations. Sindicato No.2 represents approximately 1,000 supervisors and staff. Additionally, negotiations were completed with Sindicato No.1 at another site, Spence, which includes around 1,100 operators. These successful negotiations may set a precedent, but Sindicato No.1 at Escondida has a history of industrial action, having staged strikes every few years, including in 2006, 2011, and 2017.
Financial Implications of a Strike
The financial impact of a potential strike at Escondida could be substantial. Estimates suggest that a strike lasting 10 days could lead to significant financial losses for BHP. The anticipated cost of such a strike is approximately US$250 million. This estimate includes daily losses of around US$16 million due to halted production, as well as additional expenses related to the process of ramping down and restarting the mine.
The strike could also result in increased unit costs for copper production at Escondida, adding around USc8 per pound to the existing costs. Moreover, the mine could experience a reduction of about 50,000 tonnes in copper production. This would potentially impact the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) for the second half of 2024 by approximately US$240 million, based on a copper price of $4 per pound.
If the strike extends to 44 days, the financial ramifications could be even more severe. In such a scenario, the estimated EBITDA impact could rise to around US$795 million. This extended disruption would exacerbate the financial strain on BHP, highlighting the significant risks associated with prolonged industrial action at one of the company's key operations.
BHP Group Ltd is facing potential financial challenges due to the risk of a strike at its Escondida operations. The situation underscores the broader implications of labor disputes in the mining sector, particularly in a market where commodity prices and operational efficiency are crucial to company performance.