BHP Group: A Strong Player in the Copper Market
- By
As business activities recover amidst the Covid-19 pandemic, investors are shifting assets towards the global economic recovery and growth. The materials, industrial and financial sectors are showing the best performances in terms of aggregate market capitalization growth as of the writing of this article.
In the base materials industry, copper is one of the commodities that has benefited the most from trillions of dollars of government aid packages during the Covid-19 pandemic. The red metal is also being boosted by a higher need for new infrastructure and residential areas worldwide as populations grow and natural disasters become more common due to global warming. Additionally, as electricity insfrastructure and consumption grows worldwide, there will also be an additional demand for copper to build batteries, power cables, new energy engines and mills, and many other clean energy applications (renewable energy requires more electrical infrastructure compared to fossil fuels).
Economists are predicting that the price of copper will hit $5.22 per pound before the end of July 2022, which will mark a 15% increase from the current level. The copper futures with expirations in September 2021 are at $4.54 per pound as of the writing of this article.
One way to benefit from the expected uptick in the price of copper is through BHP Group Ltd (NYSE:BHP). Helped by a favorable commodity price environment and a robust portfolio of copper assets, this Australian global miner should be able to post higher profits along the way, sending stock prices higher. The miner recently reported a positive first half of fiscal 2021, in which the underlying profit jumped 16% year over year to $6 billion and the generation of free cash flow was strong at $5.2 billion.
BHP Group Ltd will produce the red metal from the massive Escondida mine located in northern Chile, one of the biggest copper reserves in the world, as well as from its new entry, the Spence Growth Option copper mine, which is also located in northern Chile. Looking ahead to full fiscal year 2021, BHP Group Ltd targets a copper output of 1.51 million to 1.65 million tons at a cost per pound near $1.13.
Additionally, BHP Group Ltd has mineral activities in Western Australia for the production of iron ore, and in the Gulf of Mexico for the operation of the Shenzi oil and gas offshore field. Further boosts to cash levels will come from the divestment of non-core assets consisting of coal activities in New South Wales and in Colombia.
The balance sheet is already strong, as indicated by an interest coverage ratio of more than 14, despite net debt of $11.8 billion. Thus, it seems like the company has sufficient financial flexibility to fund the payment of the $2.02 per common share semi-annual dividend.
The company is also planning a major joint venture agreement with Rio Tinto Group (NYSE:RIO) for the building of a large copper-producing mine in Arizona. The State of Arizona is the most prolific land in the U.S. in terms of the production of copper, as it covers approximately 75% of the domestic demand for the metal.
The stock traded at $78.03 per share at close on Tuesday, determining a market capitalization of $199.29 billion and a 52-week range of $46.90 to $82.07. The stock grants a forward dividend yield of 5.2%.
It is not easy to establish whether the stock is cheap or not. The enterprise-value-to-Ebitda ratio of 9.68 stands below the industry median of 10.75 while the price-book ratio of 4.15 is significantly above the industry median of 2.44. Also, the 50-day moving average of $74.02 and the 200-day moving average of $73.46 are indicating that the stock is currently overpriced, but only slightly.
However, personally, I believe the stock is a buy today due to the high growth potential, even though these prices are not the cheapest. Wall Street seems to agree, as sell-side analysts recommend three strong buys and two holds for an average target price of $83.55, reflecting a 7.1% upside from the current level.
Disclosure: I have no positions in any security mentioned.
This article first appeared on GuruFocus.
