BHP Group Ltd (ASX: BHP) shares are enjoying a good week.
On the back of rising iron ore prices, the BHP share price is up 5% since Monday’s closing bell.
The mining giant’s future is looking to become ever more closely tied to the price of iron ore, alongside a range of other metals seeing strong demand, as the world moves away from fossil fuels and towards electrification.
That’s because BHP has been divesting its oil and gas segments so it can focus on areas it believes have a much longer horizon.
And that, according to Paul Xiradis, head of equities at Ausbil Investment Management, looks to be a wise plan.
What does a decarbonising world mean for BHP shares?
Xiradis broadly has a bullish outlook for ASX shares. “We do not believe Australian equities are too expensive on average when you consider them in relative terms against where long-term interest rates are sitting, and their forward earnings growth outlook,” he says.
According to Xiradis:
The equity market has an implied duration structure which has seen its value adjust as interest rates have fallen to their lows. However, we look at the future earnings growth profile for equities when assessing if sectors are cheap or expensive.
On a forward EPS [earnings per share] growth view, we believe resources (specifically battery materials, electrification metals and some bulk commodities) … are offering strong potential EPS growth for FY22 relative to value…
Growth trends with a long way to run yet can throw up some compelling opportunities. “There are some compelling thematics and tactical developments that are delivering opportunity in the market based on forward potential earnings growth,” he said.
Among the biggest trends is the world’s move away from carbon-based fuels in an effort to reduce greenhouse gases, which in turn is driving new demand for a range of metals.
And Xiradis believes BHP shares are well-positioned to benefit:
In resources, the shift towards decarbonisation, which will see significantly more commitment following COP26, is offering compelling opportunities in the electrification and battery materials metals (copper, nickel, lithium and cobalt) – we like BHP as a diversified exposure to these themes.
How has BHP been tracking?
BHP shares have struggled in 2021, alongside the other S&P/ASX 200 Index (ASX: XJO) iron ore miners. The BHP share price is down 10% year-to-date compared to a gain of 11% posted by the ASX 200 in that same period.
Over the past month, BHP is up 2%.