BHP Group PLC (LON: BHP) – Driven by a commitment to transformation, capital discipline and social value.

BHP Group PLC is a FTSE 100 listed mining Company which is involved in the processing of minerals, oil, and gas, primarily in the Americas and Australia. The global headquarter is in Melbourne, Australia. The Company is a global producer of metallurgical coal, iron ore, and copper. It also holds substantial interests in energy coal, oil, and gas. It is operating with an employee base of around 72,000 (including contractors), predominantly in the Americas and Australia. The Group has two parent companies, BHP Group Limited and BHP Group PLC as it operates under Dual Listing Structure. It sells the products worldwide, with sales and marketing managed through Houston (United States) and Singapore. The Group has been around for 134 years, and presently, it operates in over 90 locations worldwide. The Company’s business operations include evaluation & exploration, development, extraction & processing, rehabilitation, and closure.


 (Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the recent report from Global Market Insights, the market size for Global iron ore pellets market is projected to reach nearly US$70 billion by 2026, representing a compounded annual growth rate of 3.2% between 2020 to 2026. The key drivers for the market growth include - Increasing adoption of iron-based chemicals, Growing product consumption across MEA (the Middle East and Africa) region, and Rising awareness regarding the reduction of carbon emissions from steel plants. Meanwhile, as per Technavio, the global copper market size is expected to grow by 3,896 thousand metric tonnes from 2018 to 2022. The deepening and intensifying impact of Covid-19 coupled with Price-war initiated between Russia, and Saudi Arabia makes the short-term outlook quite uncertain. However, in the medium term, additional demand is expected from Asia (including China and India). Moreover, in the long run, population growth and rising living standards are persuading the future demand to rise for metals, fertilizers, and energy. The sustainable future market would also require decarbonization of stationary power and the electrification of transport.

Growth Prospects and Risk Assessment

BHP has a diverse and simple portfolio of tier one assets, which are low cost, long-life, and expandable. The Group has been consistently generating the value for shareholders. Since 2016, it has reduced the net debt by over US$17 billion, reinvested around US$27 billion in development options, and have returned over US$29 billion to shareholders. The Company’s asset base can generate strong cash flows, which will boost the group’s petroleum and copper production rate in both the short and long term. The Group has a strong foundation, with world-class assets across the best commodities, underpinned by the Capital Allocation Framework. The Company has many value-accretive projects in the pipeline with low risk and higher production capabilities.  With the expansion of new operations at Trinidad & Tobago and Southern Australia, the company has achieved higher business growth rate. It expects an increase in demand in the Asia region, which would be beneficial for its products.

 
 (Source: Presentation, Company Website)

However, the performance of the Company is exposed to certain risks and uncertainties, such as interruption in production due to Covid-19, change in regulations regarding environmental safety, reputational damage with operational accidents and injuries, geopolitical uncertainties hampering the ability to obtain licenses, and loss of business opportunity due to liquidity risk. The Company is cautious about the outlook for key commodities in the short term but expects positive demand in the long-term. Global political uncertainty regarding trade policy also poses a risk for the Group, including protectionist measures and regulation or legislation in local markets. The Company operates in multiple geographies, and profits can be impacted negatively due to the foreign exchange rate fluctuations. Recent Coronavirus outbreak could hamper supply chain and impact the business operations of the Group.

BHP may face legal action from the shareholders, as they claim that the Company misled them over safety measures at Fundão dam in Brazil, which broke five years ago and killed 19 people. The share price collapsed over 20% after the disaster. The facility was jointly owned by Vale SA and BHP Billiton Brasil. In December 2019, the Company had created the Renova Foundation, and spent $100 million on resettling victims of the Samarco disaster. Also, the Company had already considered the estimated costs of remediation as an exceptional loss while reporting the profit in FY19. Moreover, the BHP has repeatedly assured the market that Company has always adopted adequate safety measures and meet the highest standards of environmental safety. Going forward, the Company is working closely with stakeholders to achieve more consistent disclosures and setting independent tailings management standards to improve accountability and transparency across the industry.

It is prudent to note that an eight-day hearing has been initiated in Manchester city, UK, around a class action on BHP. While this might bring some hurdles for the company in the near term and progress around the same is to be watched out for.

Segment Analysis

The Company bifurcates the business into four segments, namely - Coal, Iron Ore, Copper and Petroleum.
 

1. The Coal business is involved in the mining of thermal (energy) coal and metallurgical coal. The Group has produced 70 million tonnes of coal in FY19.

2. The Iron Ore business is involved in the iron ore mining process. The Group has produced 238 million tonnes of iron ore in FY19.

3. The Copper business is involved in the mining of gold, uranium, molybdenum, copper, zinc, silver, and lead. The Group has produced 1,689 kilotonnes of copper in FY19.

4. Petroleum comprises exploration, production, and development activities pertinent to oil and gas operations. The Group has produced 121 MMboe of Petroleum in FY19.
 

The Company’s operating model is divided into three divisions - Petroleum, Minerals Americas, and Minerals Australia.


 (Source: Presentation, Company Website)

Synopsis of Recent Developments

17 June 2020: The Company announced that David Lamont would join as Chief Financial Officer from 1 December 2020. He will also be joining the Company’s Executive Leadership Team.

7 May 2020: The BHP Board announced the appointment of Xiaoqun Clever (effective 1 October 2020) and Dion Weisler (effective 1 June 2020), as independent Non-executive Directors.

Measuring Non-Financial Key Performance Indicators

In H1 FY20, there was zero fatality, and TRIF also declined by 2%, as compared to H1 FY19.

 

(Source: Presentation, Company Website)

Top Shareholders Statistics

Operational Review – Year ending 30 June 2020 (21July 2020)

The Group managed to deliver strong performance during the covid-19 mayhem and showed financial strength, disciplined controls and commitment of the workforce. The Company managed to meet full-year production guidance for energy coal assets, operated copper, metallurgical coal and iron ore. The production of petroleum remained marginally below the set guidance due to lower gas demand and covid-19 impact in the quarter ending June 2020. Due to temporary suspension of operations at Cerrejón and Antamina, the production remained below the guidance, and presently both operations have ramped up activities. Despite the disruption caused due to covid-19 and wet weather, the Group reported record production at Poitrel, Caval Ridge and WAIO (Western Australia Iron Ore). The Company also mined record coal at Broadmeadow mine and delivered record concentrator throughput (average) at Escondida mine. The production of copper equivalent for FY2020 remained in line with last year and volumes are expected to be lower in FY2021 due to reduction in workforce and a decline in the petroleum natural field. The Company expects to achieve unit cost guidance for FY2020 at NSWEC (New South Wales Energy Coal), Queensland Coal and WAIO. The unit cost for Escondida and Petroleum are expected to be better than the set guidance. The Group’s major projects in iron ore and petroleum under development are tracking as per the plan. BHP expects the first production from Spence Growth Option in between December and March, driven by measures taken in Chile to reduce covid-19 spread. The Group has reduced construction activity at Jansen and continue to access the covid-19 impact.

Financial Highlights – Decent Growth Trajectory in H1 FY2020 (ended 31 December 2019)


(Source: Annual Presentation, Company Website)

For the first half of the financial year 2020, driven by an increase in the revenue from iron ore and copper, the Group’s revenue surged to USD 22,294 million (H1 FY2019: USD 20,742 million). The underlying EBITDA stood at USD 12,084 million in H1 FY2020 (H1 FY2019: USD 10,539 million), reflecting an increase of 15%. The company’s Profit from operations stood at USD 8,314 million in the first half of the financial year 2020 (H1 FY2019: USD 7,333 million), reflecting an increase in revenue and underlying EBITDA. The Profit attributable to shareholders stood at USD 4,868 million in the first half of FY2020 (H1 FY2019: USD 3,764 million), reflecting an increase of 29%. The basic earnings per share stood at 96.3 cents in H1 FY2020 (H1 FY2019: 71 cents), reflecting an increase of 36%. The balance sheet stays robust, with net debt at US$12.8 billion at December 31, 2019. The underlying ROCE (return on capital employed) stood at 19% in H1 FY20.

Financial Ratios – Strong Profitability Margins versus the Industry Median

Reported profitability metrics for the first half of the financial year 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. BHP Group Plc has delivered a substantial return for the shareholders’ as Return on equity of 10.2% was higher as compared to the industry median of 3.2%. On the liquidity front, BHP Group Plc’s current ratio was lower than the industry median of 1.85 but has sufficient liquidity to meet short-term obligations. On leverage front, the debt-equity ratio was 0.56x, which was higher as compared to the industry median of 0.49x, reflecting that the company is more leveraged as compared to the industry.  

Share Price Performance


Daily Chart as on 22 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 22, 2020, at the time of writing (before the market close, at 9:46 AM GMT+1), BHP Group Plc shares were trading at GBX 1,717.20, down by 1.93 per cent against the previous day closing price. Stock 52 week High and Low were GBX 2,064.50 and GBX 939.80, respectively.

Bullish Technical Indicators

From the technical standpoint, shares were trading well above the short-term support level of 20-day and 30-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology - Price/Earnings (NTM)



To compare BHP Group Plc with peers, Price/Earnings multiple has been used. The peers are South32 Ltd (Price/NTM Earnings was 22.53), Glencore Plc (Price/NTM Earnings was 19.36), Anglo American Plc (Price/NTM Earnings was 11.59), Kaz Minerals Plc (Price/NTM Earnings was 7.66) and Kenmare Resources Plc (Price/NTM Earnings was 4.26). The Average of Price/Earnings (NTM) of the company’s peers was 13.08x (approx.).

BHP Group Plc Vs FTSE-100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, BHP Group Plc share price has delivered 52.64 per cent return as compared to negative 6.56 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last five years.

Business Outlook Scenario

Despite the disruptions caused in the operational performance, the Company managed to meet production guidance for the full-year for metallurgical coal, iron ore, operated copper and energy coal assets. The Group managed to deliver strong performance through disciplined operational controls and financial strength. The operations were impacted at Cerrejón and Antamina, but now activities have been ramped up. The Group expects to achieve unit cost guidance at multiple mines. BHP has a strong balance sheet with high quality and diversified portfolio of assets to show resilience against uncertain commodities market. The Group is confident towards the demand for products in the medium period to long-term period with the generation of solid cash flow. The Company is focused on disciplined capital allocation, delivering exceptional operational performance and becoming even safer in securing and creating options for the future. From the perspective of the commodities market, the Group is careful about the outlook for main commodities in the short-term but expects positive demand in the long-term.

Over the course of 3 years (FY16 - FY19), the company's revenue surged from $30,912 million in FY16 to $44,288 million in FY19. Compounded annual growth rate (CAGR) stood at 12.73 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation at the current price of GBX 1,717.20 (as on 22 July 2020, before the market close at 9:46 AM GMT+1), with lower-double digit upside potential based on 13.08x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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