BHP Group's (BHP, Financial) stock could add to its 12% year-to-date surge according to my estimates as prospects for increased production are in the offering. Large mining enterprises such as BHP have yet to reach peak production as risk factors such as post-Covid maintenance and China's pandemic lockdowns have played their hand.
Although commodity prices have moderated, I believe BHP could see its shares soar in 2023; here's why.
Operational recovery and price support
As a preface, let us observe BHP's revenue mix. According to Statista, the company generates most of its income from the metals space, catering to industrial activities and Veblen goods producers. In addition, BHP's business model includes coal, which is divided into two components: metallurgical and energy.
Source: Statista
Overall, the market anticipates rejuvenated demand for iron ore amid reopenings in China. Furthermore, copper prices could surge in 2023 amid the U.S. dollar's pending decline.
Despite price support pertaining to its metals basket, BHP could suffer from receding coal prices, which could occur amid supply and demand leveling in Europe and production increases in China. The latter will play a crucial part as China is the world's largest coal supplier.
Source: Global Data
Iron ore
BHP's CEO, Mike Henry, recently announced that the company's iron ore production could ramp up given China's latest pandemic reopening. According to Henry, China "will be a stabilizing force when it comes to commodity demand in the 2023 calendar year, with OECD nations experiencing economic headwinds." This could result in BHP reaching its fifth consecutive year of steel production above 1 billion metric tonnes.
According to the Australian miner's latest operational report, its iron ore segment's production ticked up by 2% year-over-year, driven by a softer labor market and more favorable weather.
One asset worth paying particular attention to is BHP's Samarco asset, which gained momentum during the past year, adding 8% in year-over-year production. Samarco is a key midstream component of BHP's iron ore segment, which supplies concentrator and pelleting plants. This is adding a "flow-through" for the company's flagship mines.
Furthermore, BHP's South Flank mine has ramped up after a debottlenecking. The bottleneck caused it to underperform for the majority of 2022, but South Flank is expected to expand production in the new year, which could add to shareholders' residual value.
Copper
In terms of copper, the company's well-oiled supply chain resulted in a 12% year-over-year increase in production. As stated previously, copper prices are expected to remain supportive during 2023, driven by China's reopening amid other factors, which could allow BHP to ramp up production with ease.
Source: Market Index
Dissecting BHP's copper operations illustrates higher throughput from Escondida amid improved concentrator grade. Furthermore, the company's Pampa Norte mine proliferated in tandem with its Spence tailings facility to gear up the segment's net margins.
Copper could catalyze BHP during 2023 as supply/demand inefficiencies remain. In addition, the U.S. dollar's anticipated weakness might support higher prices for the red metal, concurrently handing BHP's portfolio price support.
Coal
After an ititial boost from energy disruption cused by the Russia-Ukraine war, coal prices are at a pivotal point and could resume their recent downturn. However, BHP's coal segment is set for a production recovery, which could help phase out any price pressures.
BHP's coal business, which is mostly based in Australia, battled with heavy rainfall during most of 2022. However, both its metallurgical and energy coal operations are set to ramp up this year, with lighted rainfall forecasted. The company's latest operational report indicated that energy coal production receded by an additional amount to reach a 24% year-over-year drawdown. However, BHP's metallurgical coal production rose sharply to achieve a 5% gain during the same period.
Valuation and dividends
A mining stock's price-book ratio speaks volumes, as it is an asset-heavy business. Therefore, investors emphasize breakup value. Although BHP's current price-book ratio of 4.06 is unfavorable, investors must factor in the company's forecasted expansion and production ramp-up.
Furthermore, BHP's price-earnings ratio is 5.65 and its PEG ratio is 0.54, implying that the stock's Ebitda growth is outpacing the valuation.
Collectively, BHP's forward-looking value is in good territory, presenting an overlooked value gap.
Furthermore, BHP provides its investors with a "best-in-class" dividend profile. The stock sports a forward dividend yield worth 9.46%, which is likely to sustain if the company's historical dividend growth is anything to go by. As such, key metrics convey that BHP provides lucrative risk-adjusted total return potential.
Final word
BHP's most recent operational update provides a framework for telling inferences. The report suggests BHP could ramp up production in 2023 amid reopenings in China, a softer Australian labor market and more favorable rainfall forecasts. Furthermore, key metrics imply that BHP is relatively undervalued and has a tremendously attractive dividend profile. As such, I believe that BHP's stock could provide lucrative total return prospects.
