BHP Set To Reap Rewards From Pending Commodity Boom
Summary
- Global mining has asserted its presence as being one of the brightest investment themes in a post-Covid-19 global economy.
- Bolstered by China’s economic rebound and growing trends in renewable technologies, mega-cap mining stalwarts look poised to reap the rewards of a global commodity super cycle.
- With the US dollar under increasing pressure and interest rates pushing to the upside, what better place to be than in a diversified global mining play.
- BHP adequately fits the bill and allows investors to take a diversified approach to natural resources.
Brief Thesis
The future looks poised for upside in global commodities. Bolstered by China’s economic rebound and changing trends in consumer tastes, the mining sector is gradually showing signs of revival. With balance sheets under control and announcements of interim distributions in the form of dividends, mining giants appear to have opted to return funds to equity holders rather than reinvest in capital intensive mega-projects.
The image is caricatured somewhat but represents a degree of reality – one in which a Sino-industrial rebound, married to a drying up of natural resource projects, a weakening dollar, and a possible spike in inflation, may pave the way for a global commodity super-cycle.
In any case, any inflationary economic outlook is accompanied by a move to the upside in global commodity prices. Not only have we seen this recently with oil’s relentless push to the upside, but also in meaningful moves made by copper, nickel and iron ore, key ingredients in renewable battery technologies. While I remain bullish on global energy, it is increasingly obvious that enduring changes to the energy mix will have reverberations across the oil patch.
BHP is now London’s largest listed company, overtaking Royal Dutch Shell – possible testament to changes in trends in global natural resources
Source: Bloomberg
Yet, increasingly, it seems like various industries – such as global transport – have fallen out of love with one commodity (crude oil) in favor of another (often also energy intensive) such as nickel and cobalt. Reality is the macro-environment is positioning itself aptly for a commodity boom.
With this information, choosing which firms will wholly benefit from this positive economic landscape, provides an excellent investment opportunity. Accordingly, my outlook for BHP (BBL) is bullish in the near to mid-term.
Source: BHP Economic & Commodity Outlook
BHP is the world’s largest global mining firm. An Anglo-Australian commodities giant with deep roots in Australian mining history which saw the firm founded in the late 19th century, BHP – historically, known as Broken Hill Proprietary Company – is dual listed (UK/ Australia) and headquartered in Melbourne, Australia.
The $178B mining behemoth covers a broad range of commodities intrinsically linked to the progressive industrial revival being witnessed in certain pockets of the global economy.
Asset Portfolio BHP
Source: BHP
Iron Ore
Iron ore is the mining giant’s cash cow, generating around $10B in EDITDA during the past 6 months. Over the past year, record production has been partially offset by FX headwinds and higher third-party royalties. The overall outlook for the key ingredient to industrial grade steel production does look positive, with front month iron-ore 62% Fe CFR China futures jumping to around $173/ ton, levels not seen since 2011 (!)
Robust Chinese demand coupled with operational challenges facing Vale (VALE), the Brazilian mining giant and world’s largest iron ore producer, have provided strong tailwinds for a continued move to the upside. Additionally, gradual progress in vaccine rollouts and commitments from governments to pursue aggressive fiscal expansion should provide a foundation for resilient prices in the near term.
Front month Iron-Ore 62% Fe CFR China Futures have had a tremendous run over the past year
Source: TradingView
Iron ore developments have not been without risk however – with the Samarco Dam incident impacting operating results to the tune of nearly $400M. The catastrophe does underline the real operating risks inherent in any natural resource investment. Since 2015, multiple company initiatives, government regulations and industry body guidelines have worked to improve management of tailings dams.
Copper
Copper is BHP’s second biggest EBITDA driver, delivering $3.7B over the first half of the year. Resilient production output and a monumental copper bull run have favourably positioned the corporation’s copper assets moving forward. The company’s Escondida asset, a vast Chilean open-pit copper play, delivered strong operational performance during last year with Opex investments starting to positively bear fruit.
The Spence Growth Option at Pampa Norte, another Chilean open-pit copper asset, has started to deliver first copper allowing ramp-up to match resilient demand.
Spencer Growth Option, Pampa Norte, Chile
Source: BHP
Copper content per vehicle type – Copper Development Association
Source: Copper.org
Copper fits nicely into the strategic decarbonization theme, being a key ingredient in electric vehicle production. Copper remains a key component of electric vehicles, charging stations and infrastructure – there is approximately 3 to 4 times more copper content in battery powered EVs than conventional internal combustion engines. This bodes well given impetus for promoting renewable energy in US transport as telegraphed by the Biden government on multiple occasions.
Copper futures have had a monumental run over the past year, moving towards highs not seen for over 10 years
Source: TradingView
Petroleum
Hydrocarbon developments are another important driver of EBITDA for BHP. The firm’s asset base has gone through structural reform – with divestments in more technology focused, capex intensive shale plays in favor of more conventional offshore assets.
Timing for BHP’s exit from the US shale patch was near perfect, with the SARS-COV2 pandemic and a Russia/ OPEC price war in 2020 heavily impacting US tight oil plays. The Anglo-Australian mining giant’s $10.8B sale of its US shale assets to BP in 2018 could be perceived as a strategic stroke of genius. At a time when the most cost intensive, tech focused part of the oil patch was progressively under siege, BHP had already strategically looked to going back to basics with several conventional offshore developments.
BP has since backtracked on its commitment to the US shale patch with multiple divestments, and a strategic reversal positioning the firm as an all-green decarbonization play. Needless to say, the divestment was a strategic masterpiece from the mining giant.
Crude oil’s recent revival to pre-pandemic levels has been remarkable. While we are considerably off the $100/bbl boom levels we saw at the early part of the last decade, macro-economic indicators provide additional room to the upside.
Source: TradingView
The hydrocarbon division delivered $800M in EBITDA over the past 6 months and looks incredibly well positioned to benefit from crude oil’s progressive return to pre-pandemic highs. While adverse weather conditions played an important role in output, the company’s oil assets present real mid-term opportunity.
Interestingly, BHP’s hydrocarbon developments also act as a natural hedge – with its copper assets reaping the rewards of collective shunning of “old oil” and its hydrocarbon projects providing for upside should crude oil see a lasting revival. BHP splits its hydrocarbon assets between conventional oil – (relatively) low-cost offshore oil plays and advantaged gas, which is progressively seeing a revitalization as natural gas plays a more purposeful role in the global energy mix.
The firm’s two-pronged approach – development of conventional assets with comparably low break-even prices (<$40 boe) matched with a move into higher value liquids production is likely to pay dividends for the Anglo-Australian natural resources player.
Nickel
While nickel remains a less significant part of BHP’s mining portfolio, it does provide the firm with an additional call option on the green revolution so widely promoted by Western governments. Another key ingredient in rechargeable battery technology, the firm’s continued foray into development of nickel assets may provide a degree of risk but continues to be supported by strong nickel prices. The focus has been on delivering sustainable returns with both Olympic Dam and Nickel West assets being the subject of strategic asset integrity initiatives.
Strategic initiatives BHP
Source: BHP
BHP has continued to restructure its varied asset portfolio to position the firm for any uptick in commodity price expansion. In iron ore, focus has been on sustainable, reliable output, and disciplined cost-control. Its world class Chilean assets have allowed the firm to capitalize on copper’s revival, with green energy revolution providing an economic backdrop to prolonged movement to the upside.
Hydrocarbon developments have been a meaningful part of the company’s portfolio and possibly the most heavily reformed – divestment of cost intensive shale plays with near perfect timing and a return to conventional oil provides a hedge should the green energy revolution not take off as purposefully as initially predicted. Additionally, nickel complements the portfolio, providing additional exposure to renewable energy.
The firm has worked on reducing leverage, which can be abundantly witnessed in company’s debt maturity profile. This, in addition to returns allocated to shareholders through dividends, means that new project investment has been increasingly more selective. These effects may help place a natural floor under commodity prices accordingly.
Key Takeaways
- The global commodity space appears increasingly primed for a lasting move to the upside; a confluence of factors – a post-Covid-19 industrial revival driven by China’s insatiable demand for commodities, matched with progressive dollar weakness and a potential spike in inflation on a global economic rebound – all point to headroom for commodity growth.
- Commodity players with large, diversified assets covering a range of differing societal themes (green energy, decarbonization, a post-Covid-19 industrial rebound) are well positioned to reap the rewards of any commodity upside – this is very much the case of BHP.
- The Anglo-Australian mining giant has been a disciplined allocator of capital – with focus on iron ore, large-scale copper plays and a complete rehashing of its hydrocarbon portfolio to better match changing trends in the global energy complex.
- However, the mining industry has been subject to a multitude of operational risks – this has been witnessed with the Samarco tailing dam tragedy in Brazil. Equally noteworthy is the public outcry created by Rio Tinto’s blasting of indigenous Australian caves which were tens thousands of years old.
- BHP remains an excellent investment proposal – a balanced, well developed asset portfolio, macro-economic resilience in global commodity prices, a disciplined approach to new project sanction and a focus on building best in class, low cost, reliable assets, all point to long-term positive risk adjusted returns.
For anyone believing massive US fiscal expansion and a pending economic rebound may precipitately push inflation north, the commodity space looks like a compelling investment proposal. Key to success remains balanced asset portfolios with focus on expanding societal themes, matched with well-managed, low cost, sustainable operations.
BHP through a range of strategic divestments, business excellence initiatives and improved asset integrity has trimmed its sails in such a way for it to meet the next huge commodity tailwinds.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (10)
provide the same dividend and the same pro rata ownership of the company's assets and earnings. However, for complex reasons related to Australian tax matters -- of no import to US investors that I'm aware of -- the BBL shares are much cheaper than BHP. Today, 3/1/21, BHP ADRs closed on the NYSE at $78.76, while BBL ADRs closed at $65.10! Both pay the same dividend, and there is no withholding tax on either currently. So don't buy BHP, buy BBL!Long BBL
