When it comes to investing in the mining sector, there are usually two names that come immediately to mind for investors.
They are of course BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) shares.
But which one should you be buying right now for exposure to this side of the market? Let's see what analysts at Macquarie Group Ltd (ASX: MQG) are saying about the two.
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BHP or Rio Tinto shares?
At present, the broker is only recommending one of the two mining giants as a buy.
According to the note, the mining share that Macquarie prefers of the two right now is BHP. Though, it is worth noting also that it positive on South32 Ltd (ASX: S32) shares as well. It said:
In terms of the majors, we maintain our ratings with S32 (Outperform) and BHP (Outperform), with BHP preferred over RIO (Neutral) and FMG (Neutral). The divergence of long-term consensus iron ore prices to our forecasts have expanded the long-term fundamental valuation gap, as we forecast a market reaction associated with Simandou commissioning and Onslow ramp-up, against the backdrop of plateauing steel production in China.
FMG enjoys higher operational leverage and a full exposure to iron ore prices and remains Neutral rated, although we have conviction in their ability to compress costs when needed.
BHP shares tipped to offer double-digit returns
The note reveals that Macquarie has retained its outperform rating and $40.00 price target on BHP's shares.
Based on its current share price of $36.68, this implies potential upside of 9% for investors over the next 12 months.
In addition, the broker is forecasting a fully franked dividends per share of 94 US cents in FY 2025 and then 109 US cents in FY 2026. This equates to 3.9% and 4.5% dividend yields, respectively, and boosts the total potential return to approximately 13%.
Commenting on potential catalysts for the company's shares, the broker said:
After BHP distancing itself from the AAL deal, its relatively more conservative growth strategy is viewed more favourably in a volatile market. We believe a combination of asset sell-downs (South Australian Copper, Jansen) and infrastructure sales (WA power, QLD port and rail, Chilean water) could help BHP self-fund growth capex allowing more iron ore FCF to support higher yields.
The proceeds could help fund Jansen S2, the OD growth program as well as Chilean growth program and Vicuña. The strategy to manage WAIO's product portfolio and quality against a peaking steel production in China and the new 61% benchmark is a key near term focus.
