This year has not been too kind for ASX mining shares and their investors.
As global commodity prices tumble, the BHP Group Ltd (ASX: BHP) share price has fallen 16% year-to-date, underperforming the S&P/ASX 200 Index (ASX: XJO), which has risen 4% during the same period.
The sluggish share price movement so far this year has led BHP shares to hand over their title as the 'largest company on the ASX' to Commonwealth Bank of Australia (ASX: CBA) shares.
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Weak commodity prices
The weak global commodity prices, especially for iron ore and copper, BHP's two most important metals, are behind such weak share price performance.
Prices of iron ore cargoes with a 62% iron content fell nearly 30% from US$149 a tonne on 3 January to US$106 as the global demand, especially from China, slowed amid economic uncertainty.
At one point in July, the iron ore price fell below US$100, as my colleague Tristan highlighted. Investors were disappointed by the lack of major policy announcements at the annual policy meeting of Chinse officials.
Similarly, copper prices have been volatile in the global market. They rocketed from their recent low of US$3.5 per pound in October 2023 to over US$5 in May 2024. However, from there, the commodity price fell to US$4.1, hitting a 4-month low as demand from China's manufacturing sector weakened.
BHP is using this commodity downcycle as an expanding opportunity. Earlier this week, the Big Australian announced that BHP and Lundin Mining agreed to jointly acquire Filo Corp for C$4.1 billion (A$4.5 billion). BHP also plans to acquire 50% of the Josemaria copper project from Lundin Mining for approximately US$690 million, as my colleague James highlighted.
This may be a good strategy, considering that commodity cycles will eventually turn around.
How cheap are BHP shares compared to their history?
Let's examine BHP's current valuations using three popular valuation metrics: the price-to-earnings (P/E) ratio, the price-to-book (P/B) ratio, and the dividend yield.
BHP shares are valued at a P/E ratio of 10x on FY25's earnings estimate by S&P Capital IQ. As analysts predict earnings will decline slightly in FY26, its P/E ratio goes up to 11x on FY26 estimates.
This is fairly attractive compared to its historical range of 7x to 50x.
You might wisely point out that we can't rely purely on P/E ratios for cyclical companies because their earnings are cyclical. So, let's take a look at BHP's P/B ratio to see how the share price compares with the size of their assets.
The P/B ratio is 2.8x for the FY25 estimate and 2.6x for the FY26 estimate. During the previous downcycle in 2016, the P/B ratio dropped to as low as 1x. In the previous upcycle in 2008, the P/B ratio reached as high as 8x. It's important to note that the upcycle in 2008 was considered a 'supercycle' due to unprecedented demand from China.
BHP shares offer a fully-franked dividend yield of 5.2%, which is quite attractive. Although I can't guarantee that the trailing 12 months dividend will be maintained in the coming year, BHP has a good track record as a dividend payer. Over the long term, commodity cycles tend to recover, so it's likely that dividends will increase.
The BHP share price has fallen 2% today to $41.62.
