BHP is the world largest mining company by Capitalization and revenue, with  a diversified business from Iron Ore to Copper, from Nickel to Oil and Gas.

It was badly affected by the Samarco dam collapse that killed 13 people and damaging a large area in Brazil, but diligently it has recovered from that tragedy.

Considering the massive infrastructure projects coming live soon, BHP could easily sustain 10-15% dividend at current prices

 

Why should you be interested in this company?

BHP, after many years of overspending to sustain its growth, decided in 2016 to be more diligent, reducing debt and improving costs and rewarding more shareholders.

Below, the main advantages that I see in BHP today:

  • Diversified business
    • Its main source of profit is Iron Ore but Copper and Nickel are growing fast
  • Cost advantage
    • BHP is one of the most competitive miners, with an estraction cost for Iron ore at 17-18$ per ton (current spot price is 127$)
  • Proximity to large markets vs Brazilian competitors.
    • Being closer to the main steel producer has been an advantage in cost and time of its supply chain
  • Large growth in demand expected from massive infrastructure programs from USA, Europe and India
    • Many governments to boost their economies has decided to launch massive infrastructure and renewables programs, that should boost copper and steel demand for the next 5 to 10 years
  • Limited Debt
    • Its strong cash flow generation allowed BHP to reduced Debt substantially
  • New projects coming live soon
    • Jansen project for Potash has been approved this year, creating a cost competitive source of Potash for global agriculture
    • Nickel contract for EV battery production with Tesla and Toyota
  • Oil&Gas spin off
    • In H2 2022, BHP will spin off its Oil&Gas business and merge them with Woodside Petroleum, creating one of the largest gas producer in the world
    • I like the potential synergies that could be generated from this merger more than doubling current profit, especially if gas prices are maintained for the future.
    • This could create another source of dividend for current BHP shareholders
    • Moreover, BHP could demonstrate and continue its plan of decarbonization

 

“The Fab 4”

  1. Free Cash Flow yield higher than 10%
    1. Current Free Cash Flow reached 20B$ during last FY on a 140B$ capitalization
  2. Debt or Financial solidity
    1. BHP in the last presentation has demonstrated that could reduce its debt to 5B$, payable in few months only
  3. Strong and trusted management
    1. Management after few expensive acquisitions decided to be more prudent and focus on organic growth and debt reduction
    2. Since the debt has reduced a comfortable level, top management has decided to reward shareholders including large buyback program
  4. Margin of safety
    1. BHP since a pick in July it moved from 80$ to 52$, giving a projected dividend of 5,66$ for 2022 (higher than 10%)

 

Risks

As in every investment, there are some risks associated. Here the main ones:

  • Its profit is dependent on commodities prices. Lower prices similar to 2016 should ultimately reduce benefit, but would also limit competition due to its cost advantage
  • Political tension between China and Australia that should force Rio Tinto to find new buyers
  • Jansen project could be unprofitable in case BHP production will bring an oversupply in the market

 

Conclusion

BHP is a good bet against inflation and EV growth while enjoying a nice dividend that could pay back your investment in 5-7 years.

During the last years BHP demonstrated a lot of disciplines, closing large contract that could help its organic expansion. BHP has showed the value within its assets and the capacity to generate profit out of them.

Considering the massive infrastructure projects, BHP could easily sustain 10-15% dividend at current prices