Mercedes

Analysts' IntelligenceCurrencies & Commodities

The mining big boys

10 Dec 2021 1 month(s) ago

BHP and Rio should always get some investor attention.

When investing in the Australian stock market one of the topics that should get attention is the two mining giants: BHP and Rio. They are global players and represent a big part of the stock market’s value (market capitalisation).

Macquarie says it was a year of two halves for the iron ore market:

“Iron ore prices’ losing streak came to an end as the price rebounded above US$90/t last Friday and closed at US$104.5/t yesterday. We note some sentiment improvement in steel market support by recent positive news flow. (The Rio CEO) Mr Trott noted that while there would be some softness in iron ore prices post the winter Olympics and the Chinese New year, underlying demand remained reasonably robust and he believed the Chinese government would try to avoid a hard landing.”

Morgan Stanley says with Rio Tinto a major issue is the depletion of the massive Pilbara iron ore mines. The broker claims this is being manged:

“Gudai-Darri is expected to replace the depletion of Brockman and Yandi; the next wave of replacement will be via the development of Brockman Syncline 1, Bedded Hill Top and Hope Downs 2, and Western Range, which would come in towards the middle of this decade. The relative size of these expansions is comparable to Gudai-Darri from a size and investment perspective.

“The company reiterated its need to spend ~US$2 billion per year on replacement mines. Beyond the current pipeline, Rio Tinto is contemplating the development of Gudai-Darri phase 2 to replenish mining capacity in the long run. Permitting across the Pilbara has admittedly become more challenging and this is a risk to contend with. In aggregate, the Pilbara would require investments of ~US$3.5 billion per year through the rest of this decade to sustain output.”

Rio's share price over the last year:

Morgan Stanley says inflationary pressures remain elevated: the labour market in Western Australia “is tight and other input costs such as energy continue to present headwinds.” The broker says between 2019 and 2021, foreign exchange movements has explained ~40% of the rise in costs; while labour accounted for ~55% and energy ~12%. The upcoming investments in renewable energy should help alleviate/replace some of the energy cost pressures.”

Morgan Stanley has an equal weight (neutral) recommendation. Macquarie has an outperform recommendation with a 12 month price target of $133. The company is projected to have a fully franked dividend yield for 2022 of 11.9%.

The big issue with BHP is the merger of the company’s oil assets with Woodside Petroleum. Goldman Sachs says there is a potential $1.70 a share distribution to shareholders from BHP’s franking credits:

“BHP had a franking balance of US$16.1bn at 30 June 2021. In order for BHP shareholders to be eligible for the franking credits they must be an owner of BHP shares at least 45 days prior to the completion of the merger (subject to some caveats). The cost base of BHP shares will not be impacted by the merged value of the BHP petroleum business (does not decline for the proportional reduction in the value of the petroleum split). The effective date of the merger will be 1 July 2021.”

Goldman has a projected 2022 dividend yield of 10.9 per cent.

BHP's share price over the year to date:

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