BHP Group Ltd (BHP) NPV (DI)

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BHP reported full-year revenue up 3% to $55.7bn, driven by higher prices across iron ore and copper as well as higher sales volumes. That was partially offset by lower coal and nickel prices. Underlying cash profit rose 4% to $29.0bn.

Copper production was up 9% for the second consecutive year and is expected to rise 4% in the coming year. Iron ore production rose 1%. Capital expenditure is expected to be around $10bn in the coming year ($9.3bn the year just ended), with just under half allocated to copper operations.

Free cash flow more than doubled to $11.9bn, and net debt fell 18% to $9.1bn. There were two major exceptional losses, a $2.7bn write-down of the Nickel business and a $3.8bn charge related to a dam failure at the Samarco operation.

A final dividend of $0.74 was announced, taking the total for the year to $1.46 (equivalent to $7.4bn).

The shares rose 1.5% in early trading.

Our view

BHP is doubling down on copper after its attempt to buy parts of rival Anglo American ended in failure. It’s a difficult arena to execute large-scale acquisitions, so making the most of existing assets is key.

Fow now, iron ore is BHP's cash cow, and while demand's been robust in China and India, the former is somewhat of a question mark. The Chinese reopening hasn't been as strong as some would like, and the unknown impact of recent stimulus policies is a short-term risk.

On the cost side at least, BHP has some aces up its sleeve. Western Australia Iron Ore, which produces the bulk of the group's iron ore, has some of the world's lowest production costs. The same can be said for the Escondida copper mine in Chile. That feeds into margins that tend to be higher than its peers.

With the Anglo deal off the table investment is going to focus on future-facing commodities in copper and potash. On the copper side of things, BHP expects demand to be soft in the near term before rising steadily over the rest of the decade, and it’s positioning itself to benefit. Production has been steadily ramping up over the past couple of years and plans are underway for expansions and improvements at new and existing sites over the next few years.

The Jansen project is set to deliver one of the world's largest Potash mines. Potash, a naturally occurring mineral fertiliser, is a little different to the group's other assets - since farmers need it regardless of the economic climate. BHP's aiming to get first production in 2026. It's a hefty investment though, and execution risk is high.

Nickel was once a growth lever, but a global oversupply has led investment in this area to all but grind to a halt. BHP has written down the value of its operations and temporarily suspended production. This shows how quickly a market can change and the risks that miners face when they do. BHP hasn’t completely turned away, expecting the current dynamics to last until the end of the decade, at which point the outlook is expected to become more favourable.

All in we think BHP’s low-cost, high-margin assets are attractive and there are several medium-term growth drivers in the mix. But China remains a short-term question mark and BHP's premium valuation puts it first in the firing line if economic conditions, and commodity prices, end up worse than expected.

Environmental, social and governance (ESG) risk

Mining companies tend to come with relatively high ESG risk. Emissions, effluences and waste and community relations are key risk drivers in this sector. Carbon emissions, resource use, health and safety and bribery and corruption are also contributors to ESG risk.

According to Sustainalytics, BHP’s management of material ESG issues is strong.

BHP demonstrates strong ESG commitment with a dedicated board committee overseeing sustainability goals. They are notably aiming for a 40% female workforce by 2025. BHP is positioning itself for a low-carbon future by actively seeking out copper and nickel deposits, which are crucial metals for green technologies. There is an ongoing lawsuit relating to a dam spill back in 2015 from a joint venture that BHP has a 50% stake in. Charges have already been taken in preparation of further fines, but the outcome is unknown. BHP still owns and operates a small thermal coal business, with plans to cease operations by 2030.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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