BHP Group PLC (LON: BHP) – Record production achieved at Western Australia Iron Ore.

BHP Group PLC (LON: BHP) is an FTSE 100 listed UK based mining Company, and it is engaged in the business of extraction and processing of minerals, oil, and gas. Moreover, BHP is among the top producer of iron ore, metallurgical coal, and copper. BHP has four broader business segments – Petroleum, Minerals Australia, Minerals Americas, and Marketing. The Company is headquartered in Melbourne, Australia.

On 20 July 2021, BHP will announce an operational review for the year ended on 30 June 2021. Moreover, BHP will release full-year FY21 results on 17 August 2021.

Recent Trend of Dividend payments

BHP had paid an interim dividend of USD 1.01 per share on 23 March 2021 related to H1 FY21, while the ex-dividend date was 04 March 2021. It is equivalent to an 85 per cent payout ratio on an underlying basis.

Growth Prospects

• Robust steel demand: The Company stated that approximately 60% of commodities production support steelmaking. Moreover, the Company projected solid demand for steel driven by the decarbonisation initiatives.
• Future Facing commodities: BHP aims to increase the production of commodities such as copper, nickel, and potash over the coming years. Moreover, it would grow average copper production to more than 300 thousand tonnes per annum over the next five years.
• Reduction in steel-making emissions: The Company would decarbonise the mining equipment by displacing the diesel. Moreover, the Company had collaborated with three major steelmakers in China and Japan over the last six months to figure out feasible ways to reduce steel-making emissions.
• Major Development Projects: BHP had shown accelerated progress on the major projects in petroleum, iron ore and potash, with a combined budget of USD 8.50 billion. Moreover, the Company had achieved the first production from the Barracouta gas project in April 2021. Furthermore, the Ruby project was expected to deliver the first production in May 2021. Meanwhile, BHP remained on track regarding the commissioning of South Flank during June 2021, and it would aim to deliver the first iron-ore production in the middle of 2021.
• Environmental goals: In the medium-term, the Company expects to show a reduction of around 30% in the operational greenhouse gas emissions from 2020 levels by 2030, while it is establishing the trajectory to achieve the 2050 goal of net-zero operational emissions.

(Source: Company presentation)

Key Risks

• Climate Risk: The Company operates in zones prone to adverse weather events. Thus, it remains exposed to the risk of failures of mining or processing equipment, loss of containment, mining infrastructure failures.
• Drop in Chinese demand: Since the Company generates more than 60% of the revenue from China. Any slowdown in China's economic growth could result in lower prices and demand for commodities.
• Environmental compliance: The failure to adopt or apply ethical standards and environmental compliance may affect the reputation of BHP.
• Operational Risk: The growth trajectory can be impacted by various factors, such as increasing freight rates and operational risk regarding production stoppages or equipment failures.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of BHP Group PLC.

 BlackRock Institutional Trust Company, N.A., is the most significant shareholder as it holds nearly 213.01 million shares as of 31 March 2021. 

Operational Review (for nine months ended 31 March 2021 as on 21 April 2021)

(Source: Company result)

• BHP had delivered growth of around 7% in the total petroleum production to 25.4 MMboe (million barrels of oil equivalent) during Q3 FY21 as compared to Q2 FY21.
• Nickel West production surged by 19% to 67 kt during 9M FY21, driven by the strong performance from the new mines.
• Meanwhile, metallurgical coal production had demonstrated a quarterly increase of around 1% to 9.6 Mt during the period.    

Financial Highlights (for the half-year ended 31 December 2020 (H1 FY21), as of 16 February 2021)

(Source: Company result)

• The profit from operations grew by 17% during H1 FY21, underlying attributable profit surged by 16% YoY, with a stronger underlying EBITDA margin of 59%.
• BHP generated robust cash flows, with return on capital employed increased to 24%, net operating cash flow of USD 9.4 billion and free cash flow of USD 5.2 billion.
• The Company had managed to strengthen the balance sheet with a net debt reduction of around 7% to USD 11.84 billion as of 31 December 2020, while it was USD 12.68 billion as of 31 December 2019.
  

Financial Ratios (H1 FY21)

Share Price Performance Analysis

 (Analysis done by Kalkine Group)

On 30 June 2021, at 08:26 AM GMT, BHP’s shares were trading at GBX 2,120.00, down by around 1.44% from the previous day closing price. Stock 52-week High and Low were GBX 2,418.50 and GBX 1,450.00, respectively.

From a technical perspective, the 200-day exponential moving average of GBX 2,027.60 is supporting the upside potential in the stock price. Moreover, the MACD line trades below the centre line and crosses the signal line from below, indicating a bullish signal for the stock.

Over the last one year, BHP’s stock price has delivered a positive return of ~29.96%; and it has outperformed the FTSE All-Share Precious Metals and Mining Index (benchmark sector) with a return of around 26.42% and the FTSE 100 index (benchmark index) with a return of about 14.81%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

BHP had increased the guidance for copper production, while the production guidance for iron ore & petroleum remains unchanged for FY21. Moreover, the Copper production had anticipated being ranging from 1,535 kt to 1,660 kt in FY21. The iron ore production is expected to fall between 245 Mt and 255 Mt in FY21. Metallurgical coal production is expected to remain between 39 Mt and 41 Mt, lower from previous guidance due to the adverse impact of wet weather during Q2 FY21 and Q3 FY21. The nickel production is expected to be ranging from 85 kt to 95 kt. BHP had expected total petroleum production to be in the range between 95 MMboe and 102 MMboe. The Company had anticipated capital and exploration expenditure to be around USD 7.3 billion during FY21 and USD 8.5 billion during FY22 due to the stronger Australian dollar. The Jansen Stage 1 project related to the production of potash remained on track, and the Final Investment Decision would be expected around the mid of 2021. Overall, BHP remained well-positioned to execute the major projects and bringing new supplies in copper, petroleum, and iron ore.

The next important support level on the technical chart is at GBX 1,710.20.

Considering the increase in copper production guidance, robust return on capital employed, consistent revenue growth, bright outlook, robust profitability, record interim dividend, 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 2,120.00 (as on 30 June 2021 at 08:26 AM GMT), with lower-double digit upside potential based on 9.94x Price/NTM Earnings per share (approx.) on FY22E earnings per share (approx.). 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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