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BHP Bets on Liquidity & High Iron Prices Amid Weak Demand

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On Sep 8, 2020 we issued an updated research report on BHP Group (BHP - Free Report) . The company is poised well for growth on the back of its strong cash generation, investment in growth projects and efforts to make operations more efficient on the back of smarter technology adoption. However, the slowdown in global growth due to the impact of the COVID-19 pandemic is likely to impact demand and weigh on its results.

Fiscal 2020 Earnings Drop Y/Y, Iron Production Up

BHP Group’s underlying attributable profit from continuing operations was $9.06 billion in fiscal 2020, down 4% year over year. Gains from favorable exchange rate movements, improved productivity and lower unit costs were offset by lower prices and volumes, which led to the overall earnings decline. Revenues for fiscal 2020 totaled $42.9 billion, down from $44.3 billion in the prior fiscal.

Despite the impact of COVID-19, BHP’s iron ore production achieved record level in fiscal 2020 and was up 4% year on year. While copper production improved 2% year over year, metallurgical coal, energy coal and nicker production were down 3%, 16% and 8% respectively.

Impact of COVID-19 to Weigh on Productions & Results

In fiscal 2021, BHP Group anticipates producing between 244 and 253 Mt of iron ore compared with 248 Mt produced in fiscal 2020. Copper production is expected between 1,480 kt and 1,645 kt in fiscal 2021. Petroleum production guidance for fiscal 2021 is projected to be 95-102 MMboe. While production guidance of Metallurgical coal for fiscal 2021 is anticipated between 40 Mt and 44 Mt, the same for energy coal is expected in the band of 22-24 Mt. Nickel production for fiscal 2021 is now expected between 85 kt and 95 kt. Resurgence of coronavirus cases might lead to the further restrictions leading to suspension of operations, which casts a shadow over the company’s production outlook.

The impact of the coronavirus pandemic on the global economy remains a major concern. The International Monetary Fund’s (IMF) latest forecast anticipates the world economy to contract by 4.9% this year. Global crude steel production will be impacted this year as solid growth in China will be negated by a decline in the rest of the world.

Strong Liquidity Position to Aid Growth

Over 2016-2019, BHP Group’s long-term debt level has gone down at a CAGR of 10% while its cash position has improved at a CAGR of 15%. As of fiscal 2020 end, the company’s net debt stood at $12 billion — at the lower end of its targeted range of $12 to $17 billion. The company reported net operating cash flow of $15.7 billion in fiscal 2020, maintaining the streak of cash flow of more than $15 billion for the fourth consecutive year. Backed by robust cash flow, strong liquidity position and low cost operations, BHP Group is positioned well to navigate through these troubled times.

As of fiscal 2020 end, BHP Group had six major projects under development in petroleum, copper, iron ore and potash, with a combined budget of $11.4 billion over the life of the projects. The company plans to spend around $7 billion in capital expenditure in fiscal 2021 and approximately $8.5 billion in fiscal 2022.

Rising Iron and Copper Prices Bode Well

BHP Group will benefit from the recent increase in iron ore and copper prices. Iron-ore prices are currently trending around $125 per ton for the first time since February 2014 as the coronavirus in Brazil has fueled supply concerns while demand in China remains strong. The recovery in demand in top consumer China has also led to a rebound in copper prices lately.

Technology Adoption to Provide Edge

BHP Group is making operations more efficient on the back of smarter technology adoption across the entire value chain. This has led to 30% lessening in overhead costs and 35% reduction in workforce. Since late 2019, autonomous trucks are being implemented at three additional mine sites across coal and iron ore. The company continues to explore the potential expansion of this technology to its other Australian iron ore and coal mine sites.

Share Price Performance

BHP’s shares have gained 5.3% over the past year compared with the industry’s growth of 16.8%.

Zacks Rank & Key Picks

BHP currently sports a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space include DAQO New Energy Corp. (DQ - Free Report) , Barrick Gold Corporation (GOLD - Free Report) and The Scotts MiracleGro Company (SMG - Free Report) , each carrying a Zacks Rank #1 (Strong Buy), currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

DAQO New Energy has an estimated earnings growth rate of 348.3% for 2020. The company’s shares have surged 107% in a year’s time.

Barrick Gold has an expected earnings growth rate of 79.6% for the current year. Its shares have appreciated 69% in the past year.

Scotts MiracleGro has a projected earnings growth rate of 52.7% for the ongoing year. The company’s shares have surged 47% over the past year.

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