FTSE 100 mining company BHP Group (LSE:BHP) has had a better than expected year considering the pandemic forced some mines to close. Rising commodity prices have helped the iron ore and copper producer offset losses in oil and gas. This share price rise helped BHP achieve the rank of top FTSE 100 company by market capitalisation after reaching a valuation of £115bn. But is it among the best shares to buy now?
BHP share price fluctuations
From 2011 to 2016, the BHP share price declined. But from 2016 until today, it has rebounded nicely with a rise of 230%. However, it has fluctuated plenty during these five years. BHP’s price-to-earnings ratio is 17, earnings per share are £1.14, and its dividend yield is 4.7%.
Mining shares make notoriously risky investments. That’s because a miner’s value is often closely correlated with commodity prices, which rise in low interest environments and fall when interest rates rise. We are enjoying a rising commodity price environment just now, and many metals are becoming increasingly sought after for renewables. This is tempting me to consider investing in the sector.
Strength in operations
In its half-year operational review, ended 31 December, BHP results were mixed. It achieved record production in iron ore and a rise in zinc, but copper production was flat. It bought a bigger stake in its Shenzi petroleum asset and it’s making excellent progress in its iron ore and potash projects.
Like many of its peers, BHP is focussing its attentions on mining for the sought-after metals of the future. These include copper and nickel which are vital in the production of electric vehicles and renewable infrastructure. Nickel is essential to the lithium ion batteries used in battery electric vehicles. To this end, BHP’s Nickel West saw its nickel production increase by 31% in the six months to 31 December.
Climate activism and electrification require mining to varying degrees, so BHP is doing its bit to improve its ESG rating. In the latest in a string of renewable agreements, BHP signed a 10-year contract to buy 50% of its electricity at its Kwinana Nickel Refinery from a big solar farm in Western Australia. It’s also moving away from coal and focussing on greener alternatives. To do this, it plans on selling its New South Wales Energy Coal unit, along with a stake in a Colombian coal mine. Doing so means it will incur a hit of between $1.15bn and $1.25bn on the asset. According to Refinitiv, BHP scores 87 out of 100 for ESG. This indicates an excellent ESG performance and high degree of transparency in reporting material ESG data publicly.
Covid-19 poses challenges
With the pandemic not yet behind us, I think BHP could face continued disruption to production. In the second half of 2020 its petroleum production decreased by 12% and production of crude oil, condensate, and natural gas liquids decreased by 14%. Covid-19 also resulted in a 30% reduction in operational workforce in BHP’s Chilean assets, and this is likely to continue to be a challenging jurisdiction.
I think the uncertainty combined with a high P/E means this stock is possibly getting on the expensive side. However, I do think its involvement in the metals of the future and respectable dividend yield make it appealing. I’m not rushing to buy BHP today, but I’ll keep it on my watch list.
