2023-10-09 14:50:29 ET
Summary
- BHP Group is the largest public mining company with a market cap of $144 billion, offering diversification and long-term opportunities.
- The company is strategically aligned with megatrends such as population growth, urbanization, industrialization, and the energy transition.
- BHP is investing billions in future-facing commodities like copper, potash, and nickel, positioning itself as an ETF-like stock with exposure to multiple megatrend commodities.
Introduction
$144 billion. That's the market cap of BHP Group ( BHP ) , making it the single-largest public mining company in the world. Rio Tinto ( RIO ), its largest peer, has a market cap below $80 billion.
What used to be the Broken Hill Proprietary Company in 1885 has become a powerhouse in global mining. While a larger size doesn't indicate that a stock is a better investment, it needs to be said that BHP has tremendous diversification and opportunities to benefit from long-term megatrends.
After discussing a wide variety of mining companies, it's time to assess BHP, not only because of many requests but also because this almost ETF-like mining stock offers opportunities that allow investors to cover a number of bases without having to invest in multiple mining companies.
It also helps that BHP is now trading more than 20% below its 52-week high after dropping 8% year-to-date.
The cyclical decline in a long-term secular bull market offers enticing opportunities for investors seeking mining (and dividend) exposure.
FINVIZ
So, let's dive into the details!
It's All About Megatrends
In general, mining stocks are investments that need to be approached very carefully. Unlike your average blue chip stock, these companies rely on inflationary trends to boost their income. While the big guys are known for juicy dividends and buybacks that improve the total return, investors usually make money on just a few uptrends that they need to time right.
For example, since 1995, BHP shares have returned 645%, which includes reinvested dividends. That's not a very bad return. However, the S&P 500 returned 1,430%. Furthermore, the biggest returns came from the 2003-2008 commodity rally and the upswing that started after the 2014/2015 commodity crash.
Currently, we're in a tough situation, as cyclical growth tailwinds are largely gone.
In its fiscal year ending June 30, the company reported an underlying attributable profit of $13.4 billion. This represented a nearly 40% decrease due to lower commodity prices and elevated inflation, pressuring costs, which is visualized in the overview below.
During its earnings call, the company noted a mixed and uncertain global economic outlook in the near term.
Central banks and governments have stepped in to control inflation, resulting in slower demand in developed economies.
China and India, however, have provided relative stability for commodity demand, driven by growth in green technology, infrastructure, and autos.
Housing starts in China have been slower, but the impact of government policies remains to be seen.
Combined, China and India are expected to represent half of the world's GDP growth in 2024.
So far, the company's comments keep getting confirmed, as new headlines (not just the ones below) keep painting a mixed picture, including fluctuating demand from China and high odds that growth elsewhere (mainly from India) can offset temporary weakness.
While it can be said that China's growth outlook is "stable" at best, there's good news if we look further into the future.
Looking ahead, BHP remains optimistic due to long-term megatrends such as population growth, urbanization, industrialization, and the energy transition.
As I've discussed in a number of prior articles, these trends create a strong outlook for commodity demand. BHP's strategy aligns with these megatrends, as it is emphasizing value accretive growth in future-facing commodities.
Additionally, BHP emphasized the energy transition as a significant factor amplifying commodity demand, given the substantial investments required in decarbonization infrastructure.
For example, Freeport-McMoRan ( FCX ) expects global copper demand to rise from 25 million tons in 2022 to roughly 50 million tons by 2035!
Freeport-McMoRan
In general, we see a steep increase in metals used in net-zero technologies. This includes copper but also metals like Lithium, Cobalt, and many other metals that are very hard to mine on a large scale.
Wall Street Journal
They also noted that cost differentiation would become more pronounced, with inflation and labor costs affecting less-efficient companies.
BHP has positioned itself as a low-cost operator, primed to capture higher relative margins in certain commodities.
They underscored the challenges of bringing on new supply due to factors like grade decline (the quality of mined materials), permitting difficulties, and stakeholder opposition, creating a favorable environment for companies like BHP to thrive, as it's one of the few giants capable of boosting output.
Based on that context, BHP is already well-diversified.
While iron ore production is its biggest revenue generator, it doesn't exceed 50%. Copper revenue accounted for 30% of 2023 revenues. Coal accounted for a fifth of total revenue.
AUD in Million | 2022 | Weight | 2023 | Weight |
---|---|---|---|---|
Iron Ore | 42,426 | 47.3 % | 36,887 | 46.1 % |
Copper | 23,234 | 25.9 % | 23,827 | 29.8 % |
Coal | 21,441 | 23.9 % | 16,291 | 20.4 % |
While coal is a dying commodity, it needs to be said that it still has decades of strong demand ahead of it. When coupled with price increases during inflationary periods, I'm not worried about the company's business.
Moreover, BHP is investing billions in new capabilities.
BHP projects significant growth over medium-to-long-term time horizons. During the recent earnings call, the company detailed a flexible yet ambitious plan, aiming to increase capital spending to around $11 billion per year, with a notable portion dedicated to future-facing commodities.
Approximately 70% of this capital is earmarked for commodities such as copper, potash, and nickel, aligning with their strategic focus on capturing opportunities presented by evolving global demands and the energy transition.
As reported by Mining.com on August 31, BHP is ramping up its capital spending on the Jansen potash project in Saskatchewan by a substantial 55%, even as potash prices have declined by more than a third this year.
Construction expenditures at the site are set to increase from $647 million to $1 billion as the company looks to expedite the mine's commencement to late 2026, a year ahead of the previously planned 2027 start.
The current stage of the Jansen project, valued at $5.7 billion, is now 26% complete and is anticipated to yield 4.4 million tonnes annually upon completion.
Jansen is set to become the world's largest underground potash project.
As part of its megatrends, BHP holds a long-term view on potash, projecting demand to increase by up to 3% annually in the years to come.
The company considers potash a future-facing commodity with attractive fundamentals, aligning with global trends such as rising population, changing diets, and the need for sustainable agriculture intensification.
It's also a very important step in light of geopolitical challenges that restrict potash supply.
Furthermore, it positions BHP as an ETF-like stock, as investors not only get iron ore exposure but a wide variety of megatrend commodities like copper, potash, nickel, and related.
The company also pays a dividend.
Our disciplined performance has delivered earnings of over US$13 billion, and enabled us to announce a full year dividend of 170 US cents per share. That’s US$8.6 billion that flows back to all of our investors – including the 17 million or so Australians (or two thirds of the population) who are direct or indirect investors in BHP – and brings our total ordinary dividends to shareholders over three years to more than US$40 billion.
The current annualized dividend yield is 6%, which I expect to rise gradually along with commodity prices over the next few years.
Please note that even at current subdued commodity prices, the company is expected to generate roughly $10 billion in annual free cash flow, which is more than 7% of its market cap (despite accelerated investment requirements).
The company is also expected to maintain roughly $10 billion in net debt over the next few years, which is less than 0.4x expected EBITDA. The balance sheet is so healthy that it has A-/A1 credit ratings.
Valuation & Outperformance
The tricky thing when dealing with mining stocks or any company highly correlated to commodity prices is that the valuation almost always seems to be fair. After all, it rarely happens that analysts incorporate a strong bull or bear case into their expectations. They tend to straight-line current numbers.
BHP currently trades at 5.6x EBITDA, which is close to the long-term median.
The consensus price target (of NY-listed shares) is $57. The current stock price is $57.
In other words, like its valuation, the stock price is exactly where analysts believe it should trade.
My opinion is different. While I do not rule out that economic headwinds could potentially pressure the stock to the mid-$40 to the low-$50 range, I expect that BHP shares have the potential to continue the long-term uptrend that started in 2016 with a longer-term target of $100.
I would not be surprised if the stock were to hit this target over the next 2-3 years if the next economic upswing triggers a new wave of inflation, allowing the market to put a bigger emphasis on secular growth, which is now overshadowed by cyclical headwinds.
As such, I give the stock a Buy rating.
Takeaway
In the world of mining investments, BHP Group shines as a powerhouse with a market cap of $144 billion. While size alone doesn't guarantee a better investment, BHP offers diversification and long-term opportunities that set it apart.
The current mining landscape faces challenges, but BHP's strategic alignment with megatrends like population growth, urbanization, industrialization, and the energy transition is promising.
They're investing billions in future-facing commodities like copper, potash, and nickel, which positions them as an ETF-like stock, providing exposure to multiple megatrend commodities.
With a solid dividend yield of 6%, healthy financials, and potential for growth, BHP's outlook is optimistic.
While analysts see its valuation as fair, I see the potential for a longer-term uptrend with a target of $100. If economic upswings and inflation play their part, BHP could reach this milestone in the next 2-3 years. In my book, it's a Buy .
For further details see:
BHP: An ETF-Like Stock Benefiting From Megatrends