BHP Group Ltd (ASX: BHP) shares are looking very attractive at current levels.
That's the view of the team at Goldman Sachs, which remains positive on the mining giant following the release of a solid quarterly update.
Commenting on the update, the broker said:
BHP reported a solid March Q with stronger than expected copper production driven by higher head grades at Escondida, and slightly better than expected iron ore and met coal production volumes despite heavy rains in the quarter.
The key takeaway though was an announced re-sequencing of concentrator projects at Escondida which will fill the previously expected ~200kt dip in copper production in FY30 by accelerating the Laguna Seca debottlenecking (LSE) project and extending the life of the original Los Colorados concentrator by a few years to FY31.
In light of this, the broker has reaffirmed its buy rating and $45.10 price target on BHP's shares. Based on its current share price of $36.48, this implies potential upside of 24% over the next 12 months.
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3 reasons to buy BHP shares
So why might now be a smart time to buy BHP shares? Here are three key reasons, according to Goldman Sachs.
The first is its attractive valuation and superior margins. It notes:
BHP is currently trading at ~5.9x NTM EBITDA, below the 25-yr average EV/EBITDA of 6.5-7x, but at a premium to RIO on ~5.2x; but at ~0.7x NAV which is in-line with RIO at ~0.7x 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 is its robust balance sheet and free cash flow yield. It adds:
BHP is trading on a FCF yield of around ~4% over the medium term due to capex of ~US$11bn. With all copper growth projects including the large Resolution (USA, operated by RIO), Oak Dam (South Australia) and the Vicuna District in Argentina (Josemaria and Filo del Sol JV with Lundin Mining), would see BHP's net debt peak at ~US$18bn, above the company's US$15bn net debt ceiling.
However, we believe the balance sheet is strong with leverage of ~0.5x and gearing <20%. We expect RIO to widen the production (Cu Eq) and FCF gap over BHP over the next 5yrs. We forecast RIO's Cu Eq production to grow by ~20% and EBITDA by >30% by 2030.
Put simply: BHP is spending now to grow tomorrow — and doing it from a position of financial strength.
A final reason is its massive copper optionality. Goldman concludes:
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 ~370ktpa spare capacity by 2035.
