BHP Group (ASX:BHP) released its full-year results today, showing the company is in a strong position.
The company’s net profit after tax rose 9%. The dividend also received a significant boost from higher cash flow over the year, with the final dividend of US$0.99 ($1.39) rising 60% from the previous year.
The strong result was driven by rising copper prices and effective cost control across the wider portfolio.
A chart in BHP’s company presentation this morning is also likely to interest the market.
It shows the relative performance of mining equities against US and world indices. Clearly, the Nasdaq — or US technology — has outperformed for years:
In the financial industry, asset managers often talk about ‘rotation’ trades
This is where investors shift from one sector to another to exploit different value propositions.
Management at BHP sees the mining sector as undervalued — no small claim considering BHP itself is up 55% over the past 12 months.
BHP says commodity demand is more “broad-based” than in previous cycles. This likely means it is no longer just Chinese industrialisation driving demand, as was the case before 2020.
BHP views the market through a lens of ‘traditional’ and ‘non-traditional’ demand.
Traditional encompasses regular economic growth and industrialisation. At the moment South Asia is industrialising, while the American economy is driving global growth.
Non-traditional demand is the huge upswing in the renewable and electrification sectors, alongside the data centre buildout for AI.
This is why BHP says copper is driving its growth outlook.
The company’s conviction is clear from the amount of growth capital it is prepared to invest in copper alone:
The ‘medium term’ referred to in the graphic above is the financial eras between 2029 and 2031.
Iron ore isn’t expected to play a significant role in BHP’s growth agenda over this period.
Peter Ker, resources reporter at the Australian Financial Review, wrote the following this morning:
“The company’s new chief executive, Brandon Craig, has identified US$44.7 billion in new copper projects he could approve over the next decade.
BHP sees copper demand increasing by 2.8% for this calendar year, with the market remaining tight, even with the price up 35% for the year.
If the copper price continues to rise, it could have a significant impact on BHP’s earnings for financial year 2027.
The company models three different price scenarios, alongside its other revenue streams, through to 2031:
At current commodity prices, BHP could generate US$50 billion ($70.35 billion) in free cash flow over the next five years.
Of course, markets are volatile and unpredictable. BHP shows the assumed numbers if copper, iron ore, and potash prices fall back.
What the company hasn’t done here is model even higher prices. That is still possible.
BHP’s other big earnings driver is iron ore. BHP takes a similar position to Rio Tinto (ASX:RIO), in that depletion could mean the mining industry struggles to meet future demand.
BHP put it this way in its annual report:
“Seaborne supply is expected to rise as production from existing supply basins normalises and new capacity comes online, including Simandou in Guinea.
“However, declining grades and resource depletion will require significant investment from incumbent producers simply to maintain current output and could support future fundamentals.”
If mining equities such as BHP are to match the outstanding returns from the US technology sector over a sustained period, the market will likely need to see higher prices across BHP’s portfolio — including coal, potash, and iron ore — rather than copper alone.
However, copper is now BHP’s crown jewel, with the company among the world’s largest copper producers. Where copper goes, so does BHP.
Write to Callum Newman at Mining.com.au
Images: Unsplash & BHP Group
