There is a popular S&P/ASX 200 Index (ASX: XJO) mining stock that could be on the cusp of greatness right now.
That's the opinion of both Morgans senior analyst Adrian Prendergast and Datt Capital chief investment officer Emanuel Datt, who separately called for investors to consider BHP Group Ltd (ASX: BHP) this week.
"In a sector battling volatile commodity prices and global inflationary pressures we see BHP Group as offering the best risk-reward proposition in its sector," Prendegast said in a Morgans memo to clients.
BHP is providing an operational update on Thursday, which will shed much light before reporting season.
Working on the right things
The Morgans team has upgraded its expectations for BHP ahead of the Thursday presentation.
"BHP's Q4 operational result will further steer our 2H FY23 expectations. To that end we expect a healthy quarter in Pilbara shipments — [a] key driver," said Prendergast.
"Oz Minerals acquisition adds some value, but in particular it will help Olympic Dam returns look better."
While the BHP dividend yield sits at 8.6% fully franked, Prendergast's buy recommendation is not because he expects this to be substantially boosted this year.
"A special dividend looks unlikely with BHP digesting the US$7 billion Oz Minerals acquisition this half. We expect net debt [to finish] the year at ~US$12 billion."
BHP shares are down 7.4% over the past six months.
Meanwhile, Datt is bullish on BHP because of its sell-off of "non-core metallurgical coal assets", namely the Blackwater and Daunia mines.
"The rationale behind the divestment is sound, given the asset-specific challenges as well as the broader industry headwinds for the metallurgical coal markets are anticipated to experience as a whole," he said.
"Governments are no longer investing aggressively into 'nation building' infrastructure projects as over the past three years. They are instead taking a more focused approach with an emphasis on encouraging uptake of renewals."
Who would've thought BHP would gain from ESG?
Therefore, buying BHP shares, for Datt, makes financial sense as well as for ethical reasons.
"The sale of these assets will vastly improve BHP's residual portfolio of metallurgical coal assets and we believe would be an enormous value accretive process, over and above the notional sale value," he said.
"The sale of these assets will vastly improve BHP's residual portfolio of metallurgical coal assets and we believe would be an enormous value accretive process, over and above the notional sale value."
The simple fact is that even the resources monoliths realise the imperative to become future-proof for their shareholders.
"Ultimately, BHP is fighting with Rio Tinto Ltd (ASX: RIO) for investor dollars and is underachieving in terms of relative valuation. Much of this can be explained by the very proactive fashion in which Rio Tinto has aligned itself to investing in future-facing metals such as lithium."
This is why the price it receives for the two coal assets isn't as important as the image makeover.
"A clean divestment of these assets is likely to drive quick and material value accretion via a re-rate of BHP's stock price," said Datt.
"For instance, a 1% fluctuation in the market price for BHP represents a move in market valuation >$2 billion."
