BHP Group Ltd (ASX: BHP) shares have done well recently – it's up more than 14% since 23 October 2023. Can the ASX mining share continue its good run? Or are there negatives that investors need to keep in mind?
BHP is one of the world's biggest mining businesses, with a market capitalisation of $252 billion according to the ASX. A lot of its profit normally comes from iron ore mining, though it has exposure to commodities like copper, nickel and potash (a greener fertiliser).
Let's look at some of the positives and negatives of investing right now.
Better iron ore price and dividends?
When iron ore prices rise to a good level, the ASX mining share is able to generate huge profits.
A few months ago, the iron ore price was close to US$100 per tonne, and it has since risen to close to US$140 per tonne.
Mining costs don't usually change each month, so extra revenue largely translates into extra profit. With the iron ore price significantly higher, it's able to make more revenue and the second half of FY24 is shaping up to see a stronger profit and a bigger dividend.
How big could the profit and dividend be?
Commsec estimates suggest BHP could generate earnings per share (EPS) of $4.22 and pay a dividend of $2.22 per share. That equates to the BHP share price valued at under 12 times FY24's estimated earnings with a grossed-up dividend yield of 6.4%.
Trading Economics points out that five of China's largest state banks, including the China Construction Bank, lowered their interest rate on their deposits amid China's latest attempt to stimulate economic activity. Iron ore demand for next year is expected to be underpinned by bets of "ample infrastructure spending".
I like the company's recent moves to grow in copper as well.
Negatives for BHP shares
The ASX iron ore share sector usually behaves in a cyclical fashion. At the moment the iron ore price is on the way up, which is supporting BHP shares.
However, I think it makes a lot more sense to invest when times are tough because that's when the commodity price is lower, meaning the BHP share price is low as investors anticipate lower profits.
There could be danger if we invest at these highs because less beneficial times may arise in a year or two, causing a hit to the BHP share price. I'd guess iron ore buyers from China would enjoy a lower iron ore price.
In the future, there are headwinds like potential additional iron ore supply from Africa and perhaps slower demand from China.
Foolish takeaway
On balance, I'd be very pleased if I were a long-term shareholder. However, I wouldn't choose this moment to invest in new BHP shares. I think there's a chance the next 12 or 18 months may see a lower BHP share price. It's just a matter of being patient for (hopefully) a better valuation. There are plenty of other ASX shares to choose from if BHP is overvalued.
