Mining giant BHP Group Ltd's (ASX: BHP) share price is nudging 52-week highs. Despite relatively flat earnings, the commodity tailwind has spurred the BHP share price, which is up nearly 18% in 2019. An optimistic outlook on commodities and oil forecast could see the BHP share price break 52-week highs and test pre GFC highs.
Flat earnings
Earlier this year BHP reported relatively flat half-year earnings with operational issues hurting the balance sheet. Underlying profit from continuing operations was $4.03 billion, a 4% miss of market expectations and down 8% from $4.4 billion for the first half of 2018. BHP also reported a 1% increase in free cash flow of $3.6 billion and net debt of $9.9 billion, down $1 billion from 2018. BHP also announced an interim dividend of 55 cents per share, unchanged from 2018.
The subdued earnings where attributed to operational issues because of tropical cyclone Veronica which affected BHP's operations in Western Australia. As a result, production of iron ore was reduced by approximately 7 million tonnes. BHP estimated an $835 million hit during the December half due to the unplanned production outages.
Iron ore rally
BHP's iron ore division is its largest contributor to earnings, comprising nearly 40% of EBITDA, with copper the second largest. Despite production issues, the BHP share price has piggybacked the meteoric rise of commodity prices. The iron ore spot price has soared in 2019 following the Brumadinho dam disaster of BHP competitor Vale, the largest producer of iron ore in the world.
With the spot price for iron ore nudging 5-year highs, there remains a bullish consensus among analysts who believe that the price could break $US100 per tonne. Demand for iron ore remains steady in China and stimulus is available for exports if their economy weakens.
Broker note
Equity analysts at Macquarie recently retained their outperform rating on BHP with a price target of $41.00. The analysts cited present iron ore spot prices and upgraded oil forecasts to be key drivers for positive earnings momentum for BHP.
Foolish Takeaway
With iron ore being such a huge earner for BHP the question is how long the spot price can continue to rise. In my opinion, any significant pullback would be a buy for the short term as iron ore supply tightens. The spot price could give enough momentum for the BHP share price to break 52-week highs and possibly test pre GFC highs. BHP has a strong balance sheet with great free cash flow making it a great dividend buy, however, given the cyclical nature of commodities longer term entry points should be during large corrections.
Other mining producer companies to consider include Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG)
