The BHP (ASX:BHP) share price is Goldman Sach's top pick for iron ore

Goldman Sachs prefers the BHP Group Ltd (ASX: BHP) share price ahead of Rio Tinto Ltd (ASX: RIO) and Fortescue Metals Group Ltd (ASX: FMG)

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What a year 2020 was for iron ore. The steel-making metal soared to a 7-year high while ASX iron ore miners delivered market leading returns on improved profitability and record dividends

The Goldman Sachs commodities team is bullish on commodities and iron ore in 2021. Its 2021 sector outlook and themes report released on Wednesday points to recovering global demand, low inventories and supply constraints and a weakening US dollar to support commodity prices.

In this report, the BHP Group Ltd (ASX: BHP) share price has emerged as the broker's top iron ore pick. 

Bullish but valuations are fair

Despite the bullish sentiment for commodities and iron ore, Goldman views the sector as 'fairly valued based on a discounted cash flow (DCF) basis'. 

As a result, other ASX iron ore miners such as Rio Tinto Ltd (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) received neutral ratings after both companies soared in 2020 and early 2021. 

Goldman rates BHP share price as a buy 

BHP has emerged as the preferred pick based on valuation, commodity mix, better operating performance and more compelling medium to long-term production growth. 

Goldman raised its BHP share price target to $48.70 with a buy rating. This represents an upside of around 5%, and does not include its current dividend yield of 4.50%. 

The broker says that "BHP's portfolio is in a very strong position" and forecasts a "circa 65% increase in EBITDA and doubling of free cash flow (FCF) in FY21".

The company's strong financial performance will be underpinned by a fall in capex to US$7 billion as major minerals projects are completed, but also driven by positive copper prices and a recovery in met coal and oil prices in CY21. 

The report does flag BHP's softer December quarter due to production disruptions across copper, iron ore and oil. However, points to improved production moving forward with higher copper production, improved coal demand and oil acquisitions being finalised. 

Long term, the broker is positive on BHP's organic growth options, particularly in oil where it sees a possible 50% growth in volume to +150 million barrels of oil equivalent (MMboe).

At the time of writing, the BHP share price is trading up 0.41% at $46.19.

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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