The near-term outlook for mining behemoth BHP [LON:BHP] has deteriorated over recent months. The firm, and wider sector, face the prospect of a slowing global economy that could prompt lower demand for a range of commodities. Indeed, the world economy’s growth rate is expected to almost halve this year as rising interest rates across developed economies and China’s zero-Covid stance weigh on economic output.
Of course, uncertainty brings opportunities for long-term investors. BHP’s share price has fallen by 22% over the past six months as investors price in potential challenges. It now trades on an underlying price-to-earnings ratio of just 6x, which suggests its shares offer a wide margin of safety and scope for considerable capital growth over the long run. Further evidence of the firm’s low valuation is apparent in its dividend yield. It currently stands at 13%, which is around ten percentage points higher than that of the FTSE100 index.
The company’s strategy provides a clear path to stronger financial performance as the world economy’s outlook ultimately improves. Over recent years the business has pivoted towards operations and commodities that are aligned with the world’s push to reduce carbon emissions.
Commodities such as copper, nickel and iron ore are likely to be in high demand due to their extensive use in renewable energy infrastructure and electric vehicles. Combined with limited supply, this could equate to rising prices that positively impact BHP’s bottom line as the world economy’s performance improves. Meanwhile, a growing world population that is expected to rise from eight billion to 9.7 billion by 2050 is likely to place further demands on food production. BHP’s investment in potash mines could therefore pay off over the long run.
Relatively low risk
Of course, BHP must survive near-term economic difficulties to benefit from its long-term growth potential. Encouragingly, its latest annual results showed that net debt fell by USD3.8bn year-on-year so that it now stands at just USD0.3bn. This suggests the business has a sound financial footing from which to maintain, or even grow, its market position at a time when smaller, less financially sound peers may struggle to a greater extent.
Furthermore, the firm has a diverse range of operations that distinguish it from many industry peers. It is not focused on one commodity or a single geographic area and, having sold off most of its fossil fuel operations, is not required to invest heavily to transition its asset base towards operations that are aligned with an evolving global economy.
BHP staying the course
While commodities have historically provided a degree of protection against high inflation, the world economy’s slowing rate of growth could offset this over the short run. As a result, high volatility, and potentially further falls, cannot be ruled out for BHP’s share price over the coming months.
However, the firm’s stable financial position, high degree of diversity and future-facing operations mean it offers an attractive risk/reward opportunity for long-term investors. Its low valuation suggests now could prove to be a worthwhile buying opportunity.
We added BHP Group to our Tips section back in January. You can find out more about the reasons behind it here.
