I think it is fair to say that BHP Group Ltd (ASX: BHP) shares are not having a great time right now.
On Thursday, the mining giant's shares dropped to a 52-week low of $38.76 before closing the day at $39.21.
This means that they are now down 22% since the start of the year.
While this is disappointing, analysts at Goldman Sachs think that it could have created a compelling buying opportunity for investors and believe big returns could be on the cards over the next 12 months.
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Four reasons to buy BHP shares
According to a note from this week, Goldman has named four reasons why it thinks investors should be buying the Big Australian's shares.
The first reason is its attractive valuation. It said:
BHP is currently trading at ~6.0x NTM EBITDA (25-yr average EV/EBITDA of 6.6x), a slight premium to RIO on ~5.5x; and at 0.9xNAV vs RIO at 0.8x NAV. Over the last 10 years, BHP has traded at a ~0.5x premium to global mining peers. We believe this premium can be partly maintained due to ongoing superior margins and operating performance (particularly in Pilbara iron ore where BHP maintains superior FCF/t vs. peers).
Another reason to be positive on BHP's shares is the miner's free cash flow (FCF) generation. It adds:
From a FCF perspective, BHP is trading on a NTM FCF yield of 6%, just below Buy-rated RIO.AX on 7%. BHP has guided to ~US$11bn of capex over the medium term (above peer RIO at ~US$9-10bn) with over 50% on copper. Iron ore is contributing ~80% of BHP's FCF.
Goldman also likes BHP due to its exposure to copper, which it is feeling very positive on. The broker explains:
We remain bullish on copper and expect BHP to generate US$7.7bn in copper EBITDA in FY24 (30% of EBITDA) and increasing to US$11.7bn in FY25 (42% of EBITDA) due to ongoing supply side challenges and increasing demand.
Finally, the broker highlights that BHP has significant copper pipeline. And that doesn't include its proposed acquisition of Filo Corp, which was announced this month. It said:
We continue to believe that BHP's major opportunity is growing copper production in Chile at Escondida and Spence, and growing production and capturing synergies in South Australia between Olympic Dam and the previous OZL assets. We think BHP has a competitive edge in copper heap leaching and believe it can potentially fill ~200ktpa of spare cathode capacity by 2030 and possibly the full ~315ktpa spare capacity by 2035. An expansion of Escondida and growth in South Australia could boost BHP's copper production by ~10% to ~2Mtpa by the end of the decade.
Big returns
Goldman has a buy rating and $48.40 price target on BHP's shares. This implies potential upside of 23% for investors over the next 12 months.
In addition, the broker is forecasting a fully franked 4.75% dividend yield in FY 2025. This stretches the total potential return to almost 28%.
