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BHP misses FY iron ore production guidance, as analyst warns against piling into resources

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The Samarco dam disaster forced BHP Billiton to miss its iron ore guidance for 2016, but the mining giant upped production in Australia in order to narrow the miss.

BHP said it missed its iron ore guidance by 3 million tons due to the suspension of production at its half-owned Samarco mine. A tailing dam burst at Samarco in November, killing 19 people and causing what Brazil says is its worst environmental disaster.

The company's operational review, published on Wednesday, reported that iron ore production for the fiscal year was 2 percent lower on-year at 227 million tons. The marginal drop was due to record production in Australia as the company ramped up output to offset the suspension at Sarmaco, BHP said.

Iron ore production for the current financial year to end-June 2017 was forecast to reach between 265 million tons and 275 million tons.

Bruno Drumont | Brazil Photo Press / LatinContent | Getty Images

BHP's output miss contrasted with Rio Tinto's numbers, released on Tuesday, that showed the company was on track to meet production targets for FY2016.

BHP shares hit a two-week low after the production review was released, trading down over 4 percent at $19.01 early on Wednesday.

Iron ore prices have rallied this year on the back of continued strong steel demand in China, after the government introduced stimulus to boost bank lending, which fed through to the industrial sector.

A jump in public infrastructure investment led by state-owned enterprises (SOE), however, had raised questions about the sustainability of demand, Fenton Tribeca, director and portfolio manager at Tribeca Investment Partners, said.

While increased bank lending and infrastructure investment would likely drive strength in steel for the next few months or up to the end of the year, Fenton said he did not think it was "time to be piling in and putting in fresh money into resources and chasing that cycle," he told CNBC's "Squawk Box".

"It's really not a demand story. it's basically all about how much supply there is coming onto the market," Patersons Securities' research head Rob Brierley told CNBC's "Capital Connection".

Supply was outweighing demand growth as companies pushed out ever larger production onto the market following the commodity boom in the late noughties, added Brierley.

Data from China last week showed first-half fixed asset investment grew 9 percent from a year ago, but private sector fixed-asset investment grew just 2.8 percent in same period, an indication of heavier SOE involvement.

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