Put January 2019 down in your diary if you’re a BHP shareholder. You’re going to get a special dividend and a nice start to the new year.
The big Australian company announced this morning that it’s buying back stock and paying out cash thanks to the sale of its US onshore oil assets.
The market has been waiting for this. I flagged it earlier in the year as something to watch for.
The stock’s got a nice boost this morning – despite the fact BHP already said this was coming.
It certainly adds to the curiosity around natural resource stocks right now.
BHP is delicately balanced. It could turn in either direction from here.
Today’s Profit Watch makes it stand…
Cash flow pouring into the big miners
BHP has gone sideways in a small range all year. Anyone taking their cue off the price action would think its key markets haven’t done much.
That’s not the case at all.
Iron ore, coal and oil are all outperforming expectations. The other of BHP’s ‘four pillars’ is copper. That’s been a little weak.
Regardless, revenue is pouring into the company while this strength persists.
The Financial Times points out that BHP is set to generate a free cash flow yield of 13% at current commodity prices. That’s good.
But the market is clearly worried that these current prices aren’t going to persist.
That’s why BHP’s share price isn’t budging much.
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That brings us to Glencore and the outlook for coal.
Glencore is another massive mining player. It’s just said that the price for thermal coal is going to be higher for longer.
Asian demand is not going down. It’s rising. That’s a worry for the International Energy Agency who’s warning it makes the world’s emission target reductions difficult, if not impossible.
The thermal coal price is strong. That’s the market signal to bring in more supply.
But it’s a dirty business and banks increasingly don’t want the climate risk of lending to such projects.
And the mining companies are still not willing to invest huge sums in new mines.
Look at BHP. It’s not investing the US$10.4 billion from its sale. It’s buying back stock and paying out a dividend.
That’s a nice earner if you get some. But there’s no new coal mine coming from any of it.
Glencore says the 2019 consensus price for its high-quality thermal coal is US$94.9 a tonne.
This is the figure we need to watch from here.
If the market for coal stays above this price, that’s extra dollars that will build into the valuation of stocks like BHP and Glencore.
BHP gets 19% of its earnings from coal (including metallurgical coal as well).
China’s shift to higher quality coal from suppliers like BHP is unlikely to change anytime soon.
BHP gets about 14% of its earnings from its petroleum division. I’ve made the case for higher oil prices next year many times. I won’t labour the point.
But take note that the natural gas price is creeping up in North America, too.
This is another little fillip for BHP.
So I expect BHP’s petroleum division to do well.
That brings us to iron ore and copper…
The market is designed to wrongfoot us all
Iron ore is BHP’s big earner. It is still trading over US$70. This is above where most forecasters had it.
We can only take this day by day. The longer it stays high, the better for BHP.
Of course, the curious thing to watch for is the opposite of what everybody expects.
I doubt anyone thinks iron ore is going to go up from here. But you have to watch that kind of thing in markets.
Markets are designed to wrongfoot us all. Opportunities spring from this tendency all the time.
It’s enough for BHP to make good money as this price strength persists.
It’s copper that looks like the wildcard here for BHP.
If you picked any of these commodities, you can make the most bullish case for copper thanks to the rise of renewable energy and electric cars.
And yet, the copper price is weak so far this year. Most put it down to the trade war.
Maybe. You can never be too sure of these things.
What I DO know is that copper grades are declining worldwide. It’s getting harder to find and more expensive to extract.
The big miners are putting their money where their mouth is here. For example, BHP took a stake in copper junior SolGold recently.
Oz Minerals and Sandfire Resources are hunting for acquisitions.
Copper inventory at the London Metal Exchange is down for the year as well.
The ingredients are there for copper to lift.
Combined, I see a reasonably bright outlook for BHP, presuming there’s no wildcard climate or operational events.
We know about the trade war and China’s slowdown. That’s been discounted by now.
Certainly, should the trade war settle down, expect natural resources to rally in general.
The trade war rattled the commodity markets this year. Calling it off will lift them back up.