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The outlook is bright for BHP’s main commodity products next year and there’s good dividend potential as well
Wednesday 23 Dec 2020 Author: Mark Gardner

If 2021 is the year of global economic recovery, then one of the best placed stocks to capture that upside could be FTSE 100 miner              BHP (BHP).

The £98 billion market cap company is one of the world’s biggest producers of iron ore and copper, two metals considered to be economic bellwethers.

Iron ore prices surged in December and reached their highest level in seven years as demand soars from China, a big market for BHP, and the benefits of which should start to be felt when the firm reports its half-year results to 31 December in February 2021.

BHP can dig iron ore out of the ground for less than $15 per tonne and is able to sell it for a whole lot more given prices in the past month have gone as high as $161 per tonne, and are forecast to remain at an elevated $123 per tonne well into the first half of 2021.

Bumper profits could also see BHP pay a decent dividend, particularly given the firm’s history of returning cash to shareholders, with the company forecast to increase its total shareholder payout to $1.49 per share in 2022 according to Refinitiv, equivalent to a 5.7% yield.

Longer term BHP is well-placed to benefit from the structural growth of electric vehicles (EVs) due to its exposure to copper and nickel, two metals key for EV components.

Nickel is expected to have a breakout year in 2021, and nickel futures are already starting to trade higher in anticipation of stronger demand.

BHP’s much-hyped Nickel West processing plant has been beset by delays having meant to be fully up and running this year and has therefore been loss-making for the firm. It is expected to start producing by the second half of next year.

This underscores some of the risks with miners, as operational problems can affect their production and impact earnings, while it’s also important to note none have pricing power as all of their income depends on the market prices for the commodities they are digging out of the ground.

The likes of Anglo American (AAL), Glencore (GLEN) and Rio Tinto (RIO) also have exposure to similar areas to BHP, but they either have a poorer commodity mix – with lower exposure to either iron ore, copper or nickel – or worse ESG credentials, something which looks more likely to weigh on share prices going forward, particularly in sectors which have big impacts on their environments like mining.

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