BHP Group report

BHP Group Limited 

Revenues per share has not shown much growth. That’s partly due to commodity prices and partly due to the fact that this company has sold off some divisions over the years and paid out larger dividends and in 2022 distributed shares of a “spun-off” company. Book value has decreased for that reason and due to some write-offs. Adjusted earnings per share has grown very sharply since 2026 but then declined sharply in 2023.

Due to a weak outlook and also due to its unpredictability and complexity we are rating this a Sell and this will be the last update for this company.

We have a capital gain of 31% since the original “speculative Buy” recommendation at $44.66 six years ago. But investors who held since then have received $14.00 in dividends and a value of $8.64 in the “spun-off” shares of Woodside Energy received including dividends on Woodside. That’s a total return of 82%. We are not following Woodside and would sell those shares as well.

BHP Group Limited (BHP Australia or BHP ADR on New York which is equivalent to two Australia shares)  
Report Author(s): InvestorsFriend Inc. Analyst(s)
Author(s)’ disclosure of share ownership:  The Author(s) hold no shares
Based on financials from: June 30, 2023 Y.E. + Q2 ‘ ’24
Last updated: April 3, 2024
Share Price At Date of Last Update:  $                                  29.42
Currency: $ U.S.
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): Sell rated at $59 on New York
Qualifies as a stock that could be bought with confidence to hold for 20 years? Yes
Has Wonderful Economics? Usually yes, but depends on commodity prices
Has Excellent and Trustworthy Management? Yes
Likely to grow earnings per share at an attractive rate over the next decade? Yes
Positive near-term earnings outlook? No
Valuation? Attractive
SUMMARY AND RATING:  The graph of revenues per share (red line) shows volatility with no strong upward trend. Adjusted earnings per share had a sharp drop around 2016 but has grown strongly since then although with a very big decline in fiscal 2023. The volatility was likely mostly  due to commodity price declines with a bigger dip in earnings in 2016 caused by a Dam failure in fiscal 2015 that killed 19 people and created a large amount of costs.  The Value ratios would support a Buy rating – based on trailing year earnings. Management quality appears to be strong . Executive compensation appears to be reasonable. The short term outlook appears to be weak due to lower commodity prices. The longer term outlook seem positive. The company has a strong balance sheet. It may have advantages as a lower cost producer. This is an extremely complicated and difficult to predict company. For that reason and because of a weak near-term outlook we are rating it Sell at this time. We will no longer follow this company. Since it was originally added to this web site in 2018 the total return has been about 90% including dividends and the Woodside Energy shares that it spun off.
MACRO ENVIROMENT:BHP’s revenues are affected by the strength of the Chinese economy and by global growth.
LONG TERM VALUE CREATION: Appears to be strong given that the  balance sheet shows $2.2 billion in invested capital (This was reduced at times by share buybacks and perhaps other divestiture activity) upon which it has built up retained earnings of $36.6 billion (Despite substantial dividends paid out and share buybacks ) and the $41 billion in book value  trades in the market at a value of $145 billion. Even considering that the earnings and value were built up slowly over decades this is a strong record of long term value creation.
DESCRIPTION OF BUSINESS: Updated based on annual report for the year ended June 30, 2023. BHP isa huge global mining (mostly iron ore but also nickel and copper and metallurgical coal and a future potash operation). It is headquartered in Australia. In Australia, it has five very large mineral operations (iron ore, copper, metallurgical coal and Nickle mines and related) in Australia and in the Americas (mostly South America) it has five copper operations and one iron ore and a future potash mine in Canada.  Its equity market value as of March 24, 2024 was $145 billion U.S. dollars. It has 80,000 employees and contractors working in 17 countries and some 90 locations world-wide.  Assets by commodity are 40% copper-related, 25% iron ore-related 25% corporate and allocated (includes potash and nickel) and 10% coal-related. But note that revenues in fiscal 2023 were 46%! iron ore, 30% copper, 20% coal and 4% other.  A huge 62% of the EBIT in fiscal 2023 came from iron ore and 20% from copper and coal 18%. Sales into China represented 58%! of revenue in fiscal 2023 and Asia in total represented 90%! of revenue.
ECONOMICS OF THE BUSINESS: Based on its strong balance sheet and retained earnings it appears that the business has earned attractive returns over the years. But earnings cannot be relied upon to be consistent.
RISKS: The huge dependence on sales to China (58 of revenue) could be a risk. Wide swings in commodity prices are a big risk. There are many operational risks as well some of which can lead not only to production reductions and loss of investment but also large external liabilities. A huge Dam burst in South America in 2015 has resulted in huge liabilities, which however have been accounted for. The annual report lists many risks.
INSIDER TRADING / INSIDER HOLDING: This company trades on three major exchanges in three different currencies. We do not have a access to the insider trading information – at leas not in a fashion that is easy to understand.
WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is  simple to understand and predict (fail due to global operations in three main commodities all of which have unpredictable prices), has favorable long-term economics due to cost advantages or superior brand power (probably a pass given its long history), apparently able and trustworthy management (pass), a sensible price – below its intrinsic value (probably a pass), Other criteria that have been attributed to Buffett include: a low  debt ratio (pass), good recent profit history (pass) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (marginal pass as many existing operations may not need much spending but some of its existing extractions do deplete more rapidly)
MOST RECENT EARNINGS AND SALES TREND: Adjusted earnings had risen very sharply from fiscal 2018 to fiscal 2022. Profits fell a huge 44% in 2023 largely  due to lower commodity prices.  Revenues per share were down 17% for the same reason. In the first half of fiscal 2024, earnings are almost unchanged versus the same period in 2023 while revenues were up 6%. Overall earnings per share have trended down since a peak in fiscal 2022.
INDUSTRY SPECIFIC STATISTICS: When commodity prices change by “X”%, the impact on EBITDA and even more so earnings is magnified to some multiple of “X”. BHP reports the impact of commodity price changes on EBITDA and the impacts can be very large.
Earnings Growth Scenario and Justifiable P/E: The adjusted P/E level of about 11 combined with the dividend (which is adjusted up and down with earnings) is pricing in only modest growth.
VALUE RATIOS: Analysed at $57.04 per American Depository Receipt (which represent two shares) or  U.S. $28.52 per actual share. The price to book value ratio does not seem unreasonably high at 3.5 considering that much of the assets may have been developed many years ago and that depreciation and depletion charges may (or may not) have been offset by inflation and considering the high ROE. The dividend yield is attractive at 5.0% (representing an a 64% pay-out ratio) but this company varies its dividend somewhat up and down with earnings so the yield cannot be counted on.  The adjusted earnings P/E ratio is reasonably attractive at 10.8. The adjusted ROE is very attractive at 30%. Given the commodity nature of this company, its earnings are inherently volatile and unpredictable. Therefore, the value ratios  are not very reliable at all. However, at the current earnings, the value ratios support a rating of Buy.
TAXATION FOR SHARE OWNERS: Canadian investors should note that the ample dividends here do not qualify for the Dividend tax credit. Theia re fully taxes as regular income. In addition, I believe the 15% U.S. withholding tax likely applies except when held in an RRSP or RIF account.  The best place to hold these would be int eh U.S. “side” of an RRSP or RIF account to also avoid currency transaction fees and all the complications of holding foreign investments in a taxable account.  
Symbol and Exchange: BHP
Currency: $ U.S.
Latest four quarters annual sales $ millions: $0.0
Latest four quarters annual earnings $ millions: not available
P/E ratio based on latest four quarters earnings: not available
Latest four quarters annual earnings, adjusted, $ millions: $0.0
BASIS OR SOURCE OF ADJUSTED EARNINGS: Uses management’s figure for underlying net earnings
Quality of Earnings Measurement and Persistence: Lower quality for persistence  in that earnings are inherently volatile. On the other hand the company has generated strong cash flows which suggests higher quality earnings.
P/E ratio based on latest four quarters earnings, adjusted 11.1
Latest fiscal year annual earnings: $12,921.0
P/E ratio based on latest fiscal year earnings: 11.5
Fiscal earnings adjusted: $13,420.0
P/E ratio for fiscal earnings adjusted: 11.1
Latest four quarters profit as percent of sales #DIV/0!
Dividend Yield: 4.9%
Price / Sales Ratio #DIV/0!
Price to (diluted) book value ratio: 3.61
Balance Sheet: (As of December 31, 2023) 71% of the assets are property plant and equipment and in that category most is plant and equipment while some is mineral assets and some is land and buildings. 11% of assets are cash and cash equivalents, 7% is inventories, 5% is receivables, only 1.6% is goodwill, 2% is investments accounted for with the equity method, 2% is other (mostly other financial assets). These assets are financed as follows: 48.5% by share owner equity, which is largely entirely retained earnings as opposed to original capital raised, 4.5% by minority non-controlling interests in various operations, (a relatively low) 17% by debt, 17% by “provisions” which relates to primarily to closure and reclamation obligations but also includes employee benefit obligations,  6% by trade and tax payables, 4% by deferred tax liabilities, and 3% other financial liabilities. This is a very strong balance sheet.
Quality of Net Assets (Book Equity Value) Measurement: Book value is likely conservatively measured and includes very little purchased goodwill.
Number of Diluted common shares in millions:                                   5,073.0
Controlling Shareholder: The company is widely held with no controlling share owner although various mutual funds and other investment companies control large positions but in most or cases would not seek Board representation.
Market Equity Capitalization (Value) $ millions: $149,222.3
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 41.4%
Interest-bearing debt as a percentage of common equity 54%
Current assets / current liabilities: 1.6
Liquidity and capital structure: BHP Billiton has good liquidity and a strong balance sheet resulting in a very strong credit rating of “A minus” from Standard and Poors.
Latest four quarters adjusted (if applicable) net income return on average equity: 30.0%
Latest fiscal year adjusted (if applicable) net income return on average equity: 30.0%
Adjusted (if applicable) latest four quarters return on market capitalization: 0.0%
5 years compounded growth in sales/share 5.3%
Volatility of sales growth per share:  Volatile
5 Years compounded growth in earnings/share 29.7%
5 years compounded growth in adjusted earnings per share 9.6%
Volatility of earnings growth:  Volatile
Projected current year earnings $millions: not available
Management projected price to earnings ratio: not available
Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted)  earnings per share? No
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: #DIV/0!
More conservative estimate of compounded growth in earnings per share over the forecast period: 5.0%
More optimistic estimate of compounded growth in earnings per share over the forecast period: 15.0%
OUTLOOK AND AMBITIONS FOR BUSINESS: We are not in a position to predict its earnings in the short term since these are heavily dependent on volume of production and demand (which seems likely to grow) and on commodity prices (which we cannot predict). Iron ore prices are currently near the low end of the range over the past five years. Copper prices have been rising. Coal prices are relatively low. Nickel prices have declined substantially in the past two years. Overall, the outlook appears to be weak.
LONG TERM PREDICTABILITY: BHP traces its history back 140 years and has a strong balance sheet and is certainly likely to remain in business for the indefinite future. It seems likely that it can continue to grow in the long term.
Estimated present value per share: This company is probably far too unpredictable for this calculation to be reliable. Nevertheless, here are some numbers. We calculate  $41 if adjusted earnings per share grow for 5 years at the more conservative rate of 5% and the shares can then be sold at a higher P/E of 14.  This estimate use a 7.0% required rate of return.
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (Pass given the costs of entering the mining business). No issues with powerful suppliers (Pass). No issues with dependence on powerful customers (Probably passes this test although 65% of their revenues come from China), No potential for substitute products (Pass) No tendency to compete ruinously on price (Fail, its products are commodities). Overall it is difficult to judge the attractiveness of this industry. It could be an attractive industry for lower-cost producers but is vulnerable to over-capacity in the industry leading to excessive price discounting.
COMPETITIVE ADVANTAGE: BHP’s competitive advantage would lie in its scale and its production sites some of which it has owned for many years. I t is apparently the low-cost producer of iron ore.
COMPETITIVE POSITION: BHP presumably has a significant market share particularly in iron ore, but we do not have figures.
RECENT EVENTS: BHP is still dealing with liabilities from a huge Dam collapse in South America in 2015 that killed 19 people and caused massive property damage and in February announced an additional $3.2 billion after-tax charge for a total provision of $6.5 billion. BHP had two fatalities in fiscal 2023 and one so far in fiscal 2024. BHP has made acquisitions as it focuses on nickel and copper in addition to its huge iron ore operations. It recently too a $3.5 billion pre-tax write-off on its nickel operations duw to low nickjle prices.  In 2022 all petroleum assets were being Spun-off and combined with an unrelated company and BHP shareholders received new shares in the separate new merged petroleum company, Woodside Petroleum Ltd.
ACCOUNTING AND DISCLOSURE ISSUES: The accounting and disclosure is very detailed. The tables provided seem to be very logical and useful. This Australian company places far less emphasis on quarterly reports and we have relied on annual data only.
COMMON SHARE STRUCTURE USED: Normal, 1 vote per share. It formerly had two classes of shares but this has been corrected.
MANAGEMENT QUALITY: From reading the annual report, the company appears to be well managed.
Capital Allocation Skills: The company notes that capital allocation skills are crucial. It appears to have made good investments in the past judging by the high level of retained earnings despite paying substantial dividends and also buying back shares. However, not everything has worked out and there has been large impairments in some years.
EXECUTIVE COMPENSATION: Updated based on fiscal 2023 annual report. Compensation is generous but probably reasonable given the size of the company. The CEO’s compensation was $7.5 million, unchanged from the prior year.
BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. The Board in this case appears to be well qualified.
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.
DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.
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