Australia’s biggest company finds itself fortuitously flush with cash, and the future looks even richer for BHP Group if spot prices persist around present levels to the end of financial 2023, according to Macquarie.
The broker estimates that BHP is trading on a 2023 free cashflow yield of 13 per cent on Macquarie's own commodity price assumptions, or 19 per cent under a spot price scenario.
Free cashflow is a useful shorthand for estimating a company’s available capital for paying dividends, but it is not the same as a dividend yield. In terms of payouts, Macquarie assumes BHP declares $US2.69 ($3.90) in dividends in financial 2023, equivalent to a dividend yield of 8.4 per cent.
And on its financial 2022 forecast of $US3.67 ($5.32) in annual dividends, BHP is trading on a yield of 11.4 per cent.
As China’s lockdowns dominate sentiment around the resources sector, a new dynamic flattering the outlook for the listed miners has materialised: the Australian dollar’s drop below US70¢ (about $1.02). “Mining companies using AUD as the functional currency could enjoy higher revenue due to a weaker Australian dollar,” Macquarie said.
“Mining companies using USD as the functional currency with operations in Australia could also benefit. As a softer AUD could help to reduce cost pressures caused by supply disruptions and labour shortages, a common theme flagged by many miners during the March quarterly update.”
The broker’s iron ore forecast is $US146 ($211.80) a tonne this year, falling to $US113 a tonne next year and $US95 ($163.90)in financial 2024. The spot price of iron ore fell 4.5 per cent to $US127.55 ($185) a tonne in the spot market on Thursday, according to Platts.
Macquarie prefers BHP (and South32) over Rio Tinto and Fortescue Metals Group. It also believes BHP will earn a higher valuation from the market once it has spun-off its energy assets as planned, and that BHP will be able to maintain full franking of its future dividends.
Free cashflow yields are equally attractive for listed coal miners, such as Whitehaven Coal, which is trading on a free cashflow yield of 51 per cent for financial 2022 and 40 per cent for financial 2023 based on Macquarie's forecasts.
The price of metallurgical coal and thermal coal have both outperformed Whitehaven's share price since 2021, and the same is true for coal miners New Hope Corp and Coronado Global Resources.
Macquarie has an “outperform” recommendation and $60 price target on BHP.
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