Mining stock to watch: BHP Group Ltd (NYSE: BHP)

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BHP Group Ltd (NYSE: BHP) stock rose 0.98% on September 16th, 2020 (Source: Google finance) after the positive broker note out of Goldman Sachs. According to which, the broker has upgraded the company’s shares to a buy rating with a $40.10 price target. This price target implies potential upside of 7% over the next 12 months excluding dividends. The stock continued its bullish momentum on September 16th, 2020 (as of , 11:48 am GMT-4 ; Source: Google finance).

This target is based on valuation with the stock trading at 0.95xNAV (A$38.4/sh) and discounting long run iron ore of US$60/t (real), and best next 12-m FCF yield (10%) of the three majors on the base case estimates. The broker made the move after its commodities team raised its iron ore price forecasts through to 2022. The firm said that overall, although the company is calling the market tightness and current prices to ease in 4Q20, but the company is now more positive on the medium term outlook for iron ore. For the fourth quarter it expects an average price of US$105 per tonne (previously US$80), in 2021 it is forecasting an average price of US$90 per tonne (previously US$80), and in 2022 it expects an iron ore price of US$75 per tonne (previously US$70). Further, the broker believes BHP’s shares are good value at the current level.

Moreover, outside iron ore, the analyst also has positive outlooks on other major commodities that BHP has in its product mix. These are oil, copper, and met coal, which it anticipates to account for 35% of operating earnings in FY 2021. It also likes the growth opportunities the miner has for these commodities. The analyst notes that BHP is trading at a premium to its global peers. However, it feels this premium should remain and sees more risks for rival Rio Tinto Limited (ASX: RIO). Since 2009 BHP has traded at a 0.5x multiple premium to key global mining peers, and the analyst argue this multiple premium should continue to hold due to the diversification and stability of earnings and cash flow compared to its peers. Also, the analyst see increased risk for RIO in the wake of recent events surrounding Juukan Gorge in the Pilbara. The analyst believe RIO could see possible impact to future Pilbara approvals, production (both volume and product spec) and capex.

Meanwhile, Jefferies has also raised the price target on BHP Group Ltd from $44 to $55.

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