Are BHP Shares a Good Investment?

Team Veye | 11-Apr-2024

BHP Group Limited (ASX: BHP) is a leading Australian Resources Company, known globally for its extraction and production of critical commodities like iron ore, copper, nickel, potash, and metallurgical coal. 

The Group is strategically positioned to capitalize on megatrends like iron ore, nickel for electric vehicles, copper for renewable energy, and higher-quality metallurgical coal for steel for new infrastructure. 

The use of potash will encourage more environmentally friendly farming practices. In terms of size and sustainability, the Jansen Potash Project has surpassed all others. 

BHP Group Limited has demonstrated resilience and robust performance in FY23. Key highlights included a 1% increase in iron ore production, a substantial 9% rise in copper production, and a 4% growth in nickel production, highlighting the company's ability to meet growing demand for critical commodities.

Financially, BHP reported a total revenue of US $53.8 billion and a robust EBITDA of US $28.0 billion, maintaining a healthy EBITDA margin of 54%. The company's underlying attributable profit reached US $13.4 billion, indicating a profitable year.

BHP and Mitsubishi Development Pty Ltd (MDP) have completed the divestment of the Blackwater and Daunia mines which were part of the BHP Mitsubishi Alliance (BMA) for up to US$4.1 billion (100% basis) in cash as part of its ongoing strategic focus on higher-quality metallurgical coal. 

The answer to questions like, should I buy BHP Shares now or is BHP a good investment lies in the fact that BHP Group’s forecasted valuation metrics paint a compelling picture for potential investors. With a projected PE ratio of 10.75x by FY24, compared to the current PE of 11.79x, the company appears poised for improved earnings relative to its current stock price. Additionally, the forecasted P/B ratio of 2.93x by FY25 suggests a market valuation that is approximately 2.93 times the book value, indicating a potentially attractive investment opportunity. 

Moreover, the anticipated FCF yield of 6.87% by FY25 underscores the company's ability to generate solid free cash flow relative to its market value. These metrics collectively indicate that BHP Group Limited may be undervalued, offering investors the prospect of good value.

BHP also faces certain challenges that arise with the development of mining activities. Geopolitical events have a direct effect on mining and metals companies because these events affect commodity prices largely. Shifting global demand, high inflationary pressures, and environmental concerns are other challenges. Moreover, being a labour-intensive industry, it is extremely vulnerable to labour or skilled workforce scarcity. 


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