BHP Group PLC (LON: BHP): A proven track record of sustainable growth rate trajectory during challenging times

BHP Group PLC is a UK based resource company, and it is engaged in the business of extraction and processing of minerals, oil and gas. The Americas and Australia are the key regions where the Company operates, and the global headquarter of the Company is in Melbourne, Australia. The Company has a dual listing structure with two parent companies (BHP Group Limited and BHP Group PLC). The Company is among the top producers of iron ore, metallurgical coal and copper. The minerals business in Australia includes operations in Western Australia, Queensland, New South Wales and South Australia. The mineral business in the Americas includes coal, copper and iron ore assets in Chile, Brazil, Colombia and Canada. The Company has a petroleum unit that includes conventional oil and gas operations in the US Gulf of Mexico, Trinidad and Tobago, Eastern Canada and Barbados.

BHP Group will release the H1 FY21 results on 20 January 2021.

(Source: Company website)

Growth Prospects and Risk Assessment

BHP Group has to be innovative to drive the growth and lead the industry. The Company uses disruptive technologies and acquires strong assets to drive growth. The Company uses technology to improve frontline safety, increase productivity, reduce cost and drive value creation. Technologies such as cloud computing and smart analytics are used to improve decision making, whereas it uses advanced mining technologies to automated equipment. The Company plans to deliver cost savings through the use of technology, and it has set up technology centres that help in early resolution of specific challenges.

On the asset portfolio front, there are assets that are expected to start production over the next few years. The Spence Growth Option is expected to deliver its first production between December 2020 and March 2021. The first production from South Flank is anticipated in the mid-2021, and the Bass Strait West Barracouta project is expected to deliver the first production in 2021. The Atlantis Phase 3 achieved the first production in July 2020. There are a couple of other projects that are in the exploration and development phase, and one these projects come online they will further the position of BHP Group.

(Source: Company website)

The Company is a major resource company, and it has exposure to many risk factors. The volatility in the commodity prices and uncertainty in demand can affect the business of BHP Group. Any disruption in the operations and production caused due to macroeconomic or political events can affect the business. The health & safety accidents at the mining site can lead to the death of the workers. The lack of proper planning and technical expertise can lead to leakage of tailings and improper infrastructure. The Company is exposed to financial risk, which includes lack of liquidity, weakness in the balance sheet, large tax payments and improper financial reporting. 

Industry Outlook Dynamics

The pandemic has impacted the global economy severely, and with the exception of China, most major economies will contract in 2020. In the short-term demand uncertainty and price volatility for the commodities is expected to loom. The re-emergence of the pandemic can impact the recovery of the market. The stronger action on climate change heightened policy uncertainty and uneven recovery in the medium term will impact the medium-term outlook of the Company. In the long-term, the demand for metals and energy will increase with growth in the population and wealth. The decarbonisation of power and electrification of the transport system will pave the way for new commodities.

Changing Dynamics of the Resources

(Source: Company website)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of BHP Group Plc.

Recent Developments

On 13 November 2020: The Company announced that the Board had approved a further global multi-currency subordinated repurchase plan. This plan will reduce associated interest costs, reduce the Group's gross debt balance, and improve the BHP’s capital structure.

On 6 November 2020: BHP announced that it had completed the transaction with Shenzi, which was of US$505 million. The transaction was to acquire an additional 28% working interest in Shenzi from Hess Corporation. This transaction will bring BHP’s working interest to 72% and adds around 11,000 barrels of oil equivalent per day of production. For FY21, the total petroleum production will be in the range of 95-102 MMboe.

Key Performance Indicators (FY20)

(Source: Company Website)

A Glimpse of Business Segments (FY20)

Operational Highlights (for the quarter ended 30 September 2020 (Q1 FY21), as on 20 October 2020)

(Source: Company Website)

• Despite the impact of Covid-19, the Company attained a solid concentrator throughput at Escondida and expects the first production from the Spence Growth Option between December 2020 and March 2021.
• BHP delivered a strong performance in metallurgical coal and iron ore, with an increase of 2% year-on-year in Group copper equivalent production and record production achieved at Jimblebar.
• Iron ore has a strong supply chain performance, with an increase of 8% year-on-year in production (Sep YTD20).
• In copper exploration, the Company delivered encouraging results in the third phase of the drilling program at Oak Dam, with strong foundations for unlocking the full growth potential of this asset.
• Lower production in Nickel, driven by planned annual maintenance at the Kalgoorlie smelter and Kwinana refinery.
• Overall, BHP has started the new financial year 2021, with strong production performance in Q1 FY21.
• The major project development in petroleum, copper and iron ore are progressing well, with achievement in the first production of Atlantis Phase 3.
• All production and unit cost guidance stays unchanged for the financial year 2021, except for Cerrejón production guidance, due to an ongoing strike.

Financial Highlights (for the year ended 30 June 2020 (FY20), as on 18 August 2020)

(Source Company Website)

• The attributable profit and underlying attributable profit for FY20 stood in line with the last year’s performance.
• BHP has shown a strong balance sheet, with a net debt of US$12 billion, which is still at the lower side of the target range of US$12 billion-US$17 billion, due to application of IFRS 16 Leases.
• BHP consistently delivering high cash returns to shareholders and is determined to pay a dividend of 55 US cents per share, with strong ROCE (return on capital employed) of 17%.
• It also remained focused on maximising cash flow and managed to deliver robust earnings with free cash flow generation.
• The Company generated net operating cash flow of more than US$15 billion for the fourth consecutive year, with a free cash flow of US$8.1 billion.
• Moody’s and Standard & Poor’s credit ratings of the Company remained at the A and A2 level, respectively throughout FY2020.
• Further, the capital expenditure stood within guidance and expected expenditure related to capital and exploration would be approximately US$7 billion for FY21.
• The gearing ratio at FY20 year-end was 18.7%, which was higher than the previous year (FY19: 15%).
• During FY2020, total shareholder return (TSR) was down. Moreover, from 1 July 2015 to 30 June 2020, BHP’s TSR performance stood at 29%.

Share Price Performance Analysis

On 18 November 2020, at the time of writing (before the market close, at 8:45 AM GMT), BHP Group Plc shares were trading at GBX 1,634.00, down by 0.48% against the previous day closing price. Stock 52-week High was GBX 1,873.00 and Low of GBX 939.80, respectively.

From a technical standpoint, we could see a positive movement in the share price based on the 200-day SMA (GBX 1,563.4). Also, 90-day RSI is currently supporting the upward movement (around 49 level), which means there is a good potential for a short term rebound in the stock price. MACD line is placed above the central line, indicating a bullish setup.

Based on 2-year performance, BHP Group performed better than the FTSE 100 index, whereas the performance was slightly lower than the FTSE All-Share Mining index. BHP Group generated a return of around 6.1%, whereas the FTSE-100 Index return was close to -9.36%, The FTSE All-Share Mining Index return was about 8.8%. In the last five years, BHP Group Plc share price has delivered around 90% return as compared to the approximately 1.54% return of FTSE 100 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company has a diversified asset portfolio and global geographical presence, which, coupled with a strong liquidity position, has well placed the Company in uncertain times. BHP Group expects to generate solid cash flow, and it is confident over the demand for its products in the medium and long-term.  The Company has set a capital and exploration expenditure target of USD 7 billion for FY21, of which it plans to spend USD 450 million on the petroleum exploration programme. The Spence Growth Option is expected to start its first production between December 2020 and March 2021. In the H1 FY2021, the Company expects to complete the commissioning of the desalination plant and capitalisation of the associated lease of USD 600 million. BHP Group signed an agreement with Hess Corporation to acquire an additional 28% interest in Shenzi for USD 505 million and increase its ownership in the project to 72%. The deal is expected to close by the end of December 2020.   

BHP Group stated that it expects to produce copper in the range of 1,480 and 1,645 kt in FY21. The copper production at the Chilean asset of the Company is currently operating with a lower workforce, and it will remain at the same level in the December quarter. The iron ore production is expected to be around 244 Mt and 253 Mt in FY21, and the production is expected to be slightly affected in the December 2020 quarter due to maintenance activity. The production of the Metallurgical coal is expected to be in between 40 Mt and 44 Mt. The nickel production is expected to be in the range of 85kt to 95kt and zinc production to be in between 140 kt and 160 kt. The total petroleum production is expected to be in the range of 95 MMboe and 102 MMboe.

(Source: Company website)

Considering the solid production performance in Q1 FY21, record production achieved at Jimblebar, completed the transaction with Shenzi, robust balance sheet, sustainable cash returns, a good relationship with key shareholders, and support from the valuation as done using the above method, we have given a “BUY” recommendation on BHP Group at the current price of GBX 1,634.00 (as on 18 November 2020, before the market close at 8:45 AM GMT), with lower-double digit upside potential based on 7.43x Price/NTM Cash Flow (approx.) on FY21E cash flow 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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