Despite having high-quality assets, a solid balance sheet and a fully franked dividend yield of around 4%, BHP’s (ASX: BHP) share price is currently trading at a 22% discount to Goldman Sachs' 12-month target price of $47.30 and a 27% discount to its 52-week high of $50.61.
While BHP has diversified exposure to a number of commodities, the stock remains heavily exposed to iron ore prices, which at $104 per tonne is less than half what it traded at in July 2021.
Meanwhile, shareholders have expressed impatience waiting for the next big kicker to correct the perceived price overhang and institutional investors appear reluctant to buy the stock until something meaningful happens.
Since BHP’s failed and in hindsight somewhat ill-suited $59 billion takeover bid for Anglo American, shareholders have been left looking for signals as to what M&A or other corporate activity might move the needle on the struggling share price.
M&A activity
With that in mind Azzet recently asked BHP CEO Mike Henry to unpack his thinking around the next major acquisition and his preferred assets in the commodity space.
From the get-go, Henry reminded this masthead that BHP doesn’t need M&A.
While M&A activity is a tool in the kit to create long-term value for shareholders, it is not Henry’s primary focus.
“We have been very clear with shareholders for years now that we have multiple leavers for creating value, focusing on base business and getting the most out of the capital we’ve already deployed through productivity – this is our single biggest value growth lever,” says Henry.
Rather than acquiring new resources, the more immediate remit, adds Henry is figuring out how to get more of the resources the company already has out of the ground quicker and more sustainably for good returns.
For example, as the world’s largest copper producer with the world’s largest copper resource, Henry is focused on getting more of those copper units out of the ground and to market more quickly.
Greenfields exploration
Henry also explained that greenfield explorations are a stronger focus for BHP than M&A activity right now.
“We’re focused on greenfield explorations and have increased our greenfield exploration spend to find the next wave of future copper projects,” says Henry.
“We’re looking at what have been coined ‘early stage’ entry to get a toe-hold position in these big resources that have been discovered by others; where we can bring our balance sheet and capabilities to bear on developing these resources.”
Henry is referring specifically to BHP’s recently completed US$2 billion acquisition of Toronto Stock Exchange-listed Filo Corp (TSX/NASDAQ: FIL) which owns 100% of the Filo del Sol (FDS) copper project located in the Vicuña district between Argentina and Chile.
Iron ore, coal spin off
While Henry has not discussed it, there’s growing market speculation that over the long term, BHP will offload all or part of its iron ore and coal operations to concentrate its attention on its two preferred commodities.
BHP's future strategy centres on being a leading supplier of copper, the metal needed for the energy transition.
The other key commodity of interest to BHP is potash (aka fertiliser) through its Jansen project, located in Saskatchewan, Canada which is expected to begin in late 2026.
Once fully ramped up, Jansen will become one of the world's largest potash mines, producing approximately 8.5 million tonnes per annum (Mtpa).
Going green
It’s understood that moves were afoot by BHP to “green” its business as a prelude to acquiring Anglo American.
By unbundling iron ore – which accounts for around 60% of its profits - along with its coal assets, BHP will effectively remove the bulk of its carbon exposure.
However, BHP is understood to have concluded that it simply wasn’t the right time to offload its iron ore and coal assets. In short BHP still needs the huge amounts of cash iron ore and coal both generate to fund capital spending at its Escondida copper complex in Chile and its Jansen potash development.
BHP's iron ore segment revenue accounted for around US$28 billion in FY24. By comparison, BHP's copper segment had the second highest revenue that year, at US$18.6 billion.
Future acquisitions
Meanwhile, Henry has made it clear that BHP will only pursue M&A activity in commodities it likes.
“What we’ve said is that primary commodities for BHP are copper and potash,” says Henry.
“These have to be quality resources that are aligned with our strategy; large, long life and sitting at the lower end of the cost curve.”
Rather than simply going out and buying more copper for the sake of it, Henry wants to ensure value can be unlocked through BHP’s ownership.
This value, added Henry can come through synergies or BHP’s better ability to operate and grow an underlying asset.
BHP's market cap is $186 billion making it the second largest stock on the ASX; its share price is down 7% year-to-date.
BHP sentiment among investors has been weak, resulting in a bearish sloping 200-day moving average.
Consensus is Moderate Buy.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
