Goldman rates the BHP (ASX:BHP) share price as the best ASX iron ore producer

Goldman Sachs believes the BHP Group Ltd (ASX: BHP) share price is the best iron ore major to buy, driven by its strong margins.

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Goldman Sachs has taken a deep dive on the Pilbara iron ore majors, BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).

After running the ruler on operational and production metrics, the broker is buy rated on the BHP share price while neutral rated on Rio Tinto and Fortescue. 

Lower capital intensity 

Goldman Sachs brings to our attention the significant capex expenditure required for Rio Tinto. Rio’s 2020 results confirmed that its Pilbara capex will remain above US$3 billion per annum, almost double its peers, until at least 2024. The broker believes Rio Tinto runs the risk of having the highest number of mines to replace, as well as the greatest production and capex risk from the Juukan Gorge incident

This incident involved the company destroying a historically and culturally significant site in Western Australia, that resulted in the departure of its chief executive and two senior executives. Goldman believes current and future heritage approvals could poise a risk to its Pilbara operations.

As a result of mine depletion issues and heritage challenges, Goldman cites that Rio Tinto may have 12 replacement mines to build by 2027, which equates to almost current annual production. 

As key advantage for BHP is its larger mine sites and mining hubs which lowers the requirement for replacement sites. The broker notes that this brings BHP’s capital intensity in Pilbara to average c. US$7/tonne over the next five years, compared to Rio Tinto and Fortescue at c. US$11/tonne. 

Strong margins to drive the BHP share price 

The report positions BHP as the iron ore major with the highest earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins. In the long run, Goldman forecasts that BHP will generate an EBITDA margin of 60% compared to Rio at 56% and Fortescue at 47%. 

From an iron ore grade perspective, BHP is also positioned to surpass Rio Tino when its South Flank mine ramps up and replaces the lower grade Yandi mine. Rio Tinto currently has the highest average product grade at 61% compared to BHP at 60% and Fortescue at 57–58%.

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Motley Fool contributor Kerry Sun 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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