If you're not averse to investing in the mining sector, then BHP Group Ltd (ASX: BHP) shares could be well worth considering right now.
That's the view of analysts at Goldman Sachs, which see potential for big returns over the next 12 months.
What is the broker saying?
Goldman Sachs has been visiting the miner's copper operations in Chile this week and management took the broker through its huge plans. It said:
The first day of BHP's Chile copper investor tour included a large presentation that presented the Chilean project growth options across the Escondida and Pampa Norte (Spence and Cerro Colorado) copper mines, which contain over 150Mt of copper. The BHP team believes the 10 growth projects presented, totaling up to US$15bn of growth capex, are sequenced in a way that maximizes value from the Chilean portfolio, but also aligns with permitting timelines and group capex allocation targets.
The broker acknowledges that this will need a significant investment and push the miner's debts above target levels. However, it feels it has the balance sheet to cope with this and ultimately believes it will be worth it. It also sees opportunities for BHP to sell assets to generate additional cash. Goldman adds:
When we overlay this Chilean growth copper capex of up to US$15bn with spend on Vicuna in Argentina, South Australian copper, Jansen potash, and Samarco outflows, we see the potential for BHP's net debt to push through the US$15bn net debt ceiling it has stated towards the end of the decade.
However, we believe the balance sheet is strong and that gearing and leverage are more appropriate balance sheet metrics. If all projects achieve FID (most expected in CY27-28) then we estimate that BHP's annual Chilean copper growth capex could peak at around US$3.5-4bn in approximately 2030, with total Chilean copper capex (including sustaining) potentially peaking at US$5.5-6bn in around that year. To help fund copper growth, BHP highlighted the possibility of infrastructure sales and lease backs, as was done for the Spence water desalination plant in 2017, and that we have witnessed in other major projects in Chile (e.g., Antofagasta and the sale of Centinela water infrastructure).
Should you buy BHP shares?
In response to the above, the broker has reaffirmed its buy rating and $47.30 price target on the Big Australian's shares.
Based on its current share price of $40.31, this implies potential upside of 17% for investors over the next 12 months.
In addition, Goldman is forecasting a fully franked 3.8% dividend yield in FY 2025, which boosts the total potential return beyond 20%.
Goldman believes that its shares are good value, even if they do trade at a premium to rival Rio Tinto Ltd (ASX: RIO). It explains:
Attractive valuation, but at a premium to RIO. BHP is currently trading at ~6.0x NTM EBITDA (25-year average EV/EBITDA of 6.6x), a premium to RIO on ~5.0x; and at ~0.85x NAV vs. RIO at ~0.80x 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).
