ii view: BHP shares soar after commodity portfolio revamp

Simplifying its structure, enhancing its green credentials and an attractive yield. Buy, sell or hold?

Full-year results to 30 June

• Underlying attributable profit up 88% to US $17.1 billion
• Final dividend of US $2.00 per share
• Total full-year dividends announced of US $3.01 per share
• Returns to shareholder to more than US$15 billion for the full year
• Net debt down 66% to $4.1 billion

Chief executive Mike Henry said:

"The BHP team has achieved a great set of operational and financial results in the year past. Most importantly, our improved results were achieved safely, with 2021 being our second consecutive full financial year with zero fatalities in BHP operations. We achieved several production records and our four major capital projects were executed on time and on budget.”

ii round-up:

Mining mammoth BHP (LSE:BHP) today announced both full-year results and a strategic review which included confirmation of a speculated merger of its petroleum business with that of Woodside Petroleum (ASX:WPL).

The miner is also planning a major $5.7 billion investment in the Jansen Canadian potash project, with first production targeted for 2027. The moves see it further exit the carbon fossil fuel oil industry and add further exposure to rising population trends, with potash used extensively in the farming fertiliser industry. 

The Sydney and London listed miner also announced plans to unify its corporate structure under its existing Australian BHP parent company to realise simplification benefits and enhance strategic flexibility. The unification will essentially see the Australian half of BHP acquire the British half. Its shares will continue to trade in the UK, South Africa, and the US after unification, along with a primary listing in Sydney Australia.

BHP shares rose by more than 9% in UK trading, having already doubled since market lows in March 2020. Shares for major rival Rio Tinto (LSE:RIO) are up by around 80% over that time. Shares for both Glencore (LSE:GLEN) and Anglo American (LSE:AAL) are up by around 200%. 

Underlying, or adjusted profit for the year to 30 June rose by 88% to US$17.1 billion, driven by a recovery in prices for its key commodities iron ore and copper following the pandemic. 

A final dividend of $2 per share brings total shareholder returns to more than US $15 billion for the full year. 

The all‑stock merger of its petroleum business with Woodside will create a global top 10 independent energy company by production. Woodside plans to issue new shares to BHP shareholders. The new enlarged Woodside will be owned 52% by existing Woodside shareholders and 48% by existing BHP shareholders. 

BHP’s unification is expected to occur in the first half of the 2022 calendar year, with the proposed petroleum merger with Woodside to follow.

ii view:

Latest strategic plans to exit climate change-related oil and gas and strengthen exposure to potash required by farmers, clearly add to BHP's environmental, social and governance (ESG) appeal for investors. The news comes in the wake of an existing adjustment to its coal portfolio, moving to focus on higher-quality coking coals under its climate change strategy. 

Management previously committed to reducing emissions across its operations and to achieving net zero operational emissions by 2050. Climate change is now part of its corporate strategy and is assessed under portfolio decisions. 

For investors, the pandemic and the spread of the Delta Covid variant in Asia, should not be overlooked. Exposure to Chinese economic fortunes also needs to be remembered. China is BHP's biggest customer, accounting for around three-fifths of group sales. Relations between the West and China have grown more strained, and recent Chinese economic data has proved more mixed. 

On the upside, cost saving synergies from its Woodside deal are expected to be more than US$400 million per annum. BHP shareholders will now have the choice as to whether to hold fossil fuel-related Woodside Petroleum shares. The recent signing of an agreement for a nickel exploration alliance in Canada potentially adds to BHP's exposure to battery-related materials and electrification trends. In all, and with ESG policies strengthened and the shares sitting on a forward estimated dividend yield comfortably over 7%, the mining giant will likely attract long-term investor support. 

Positives

• Exposure to a diverse portfolio of commodities
• A focus on shareholder returns

Negatives

• Ongoing pandemic uncertainty
• Growing Western tensions with major customer China

The average rating of stock market analysts:

Buy