So long as you feel comfortable with a bit of volatility, getting exposure to commodities through one or a few listed companies can be seriously profitable.
FTSE 100 constituent BHP Group (LSE: BHP) is a great example. Shares in the world’s largest miner are up a very respectable 25% over the last year. However, if you’d had the courage to buy the stock just over three years ago when the commodity market last dropped like a stone, you’d be looking at a gain of around 200%.
Despite the less-than-enthusiastic reaction from the market to today’s interim results, I believe those already invested should stay the course.
Profits down
As a result of “unplanned production outages” at its operations in Australia and Chile (preventing the company from realising the $460m of costs savings it had previously forecast), BHP stated that production is now likely to be “broadly flat” in 2019.
This, coupled with a fall in copper prices and decline in ore quality, led the company to report underlying attributable profit came in at US$3.7bn — 8% lower than that reported for the previous six months.
Underlying earnings were $10.5bn, down almost 3% from the $10.8bn achieved in the prior trading period. Margins from continuing operations also fell from 55% to 52%.
Long term focus
BHP’s shares were trading on 12 times expected earnings before markets opened this morning. That’s a little more than top tier peers such as Rio Tinto and Glencore, but reasonable relative to the market as a whole.
Whether the positive momentum over the last year will continue is hard to say, of course. With a market capitalisation of £95bn, the shares are certainly very unlikely to rocket. As legendary growth investor Jim Slater once remaked, “elephants don’t gallop.“
Nevertheless, there are reasons to remain bullish on BHP’s prospects both in the short and long term in spite of today’s fairly disappointing numbers.
With regard to the former, CEO Andrew Mackenzie expects a “strong second half” will make up for the difficulties experienced in the first six months and that the company has “a portfolio of attractive development opportunities.“
Longer term, I’m inclined to think that declining stockpiles and the growing popularity of electronic vehicles could cause a very decent rise in the prices for many metals in the coming years, particularly copper.
There’s also much to be said for BHP’s geographical and resource diversification. Unlike smaller miners, the company produces a wide range of commodities (iron ore, coal, uranium, silver, lead, zinc, uranium, gold, oil and gas) in addition to the aforementioned red metal. That doesn’t protect you from a general downturn, of course, but it does make it decidedly less risky play if you are contemplating getting exposure to the sector.
Having also disposed of its onshore assets to BP over the period and returned $10.4bn to shareholders through a combination of share buybacks and a special dividend last month, BHP should also be of interest to income hunters.
Today’s interim payout may have been kept at 55 cents per share but, with its debt pile down by $1bn (to $9.9bn) since the end of June and expected to “remain at the lower end” of its target range of between $10bn and $15bn, I see no reason why BHP won’t continue rewarding its loyal holders going forward.
