Is it still a good time to buy shares in FTSE 100 mining company BHP?

Investors often turn to commodities and mining companies when inflation gains traction, but every miner has its unique circumstances.

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Price inflation has become a challenge again. And the classic response from investors over previous decades has been to head for gold, commodities, real estate and selective stocks. 

All those asset classes can work as a hedge against inflation. But they’re never perfect. And they can also deliver good investments when inflation isn’t so much of a problem rather than being inflation-specific ideas.

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Each mining company is unique

On top of that, differing outcomes can arise for investors depending on the particular stocks they choose. For example, not all mining companies will likely do well at the same time. Sometimes specific operational challenges unique to a business can derail its potential to make money and sink its stock price — even if commodity prices are booming.

Meanwhile, FTSE 100 mining giant BHP (LSE: BHP) has been shooting higher. With the share price around 2,440p, it’s near an all-time high. Is it still a good time for me to buy the stock or am I too late?

To answer my own question, I’d first consider the stock in terms of its valuation. And one of the first things that I notice is City analysts expect earnings to decline by around 26% in the trading year to June 2023.

However, part of that prediction probably arises because the business is in a state of flux. In today’s operational review, the company said it expects to complete the merger of its petroleum business with Woodside Petroleum Ltd in June 2022.

In August last year, BHP announced the deal explaining the merged oil and gas portfolios of the two companies would create a global top 10 independent energy company by production”.

 BHP shareholders will still benefit from the merged assets after the deal completes. And that’s because the expanded Woodside business will be 48% owned by existing BHP shareholders. To achieve that, Woodside will issue new shares for BHP shareholders.

However, last year, BHP’s oil and gas assets delivered around 6% of overall underlying earnings. And that income will be absent in the years after the merger, which goes some way to explaining why analysts have marked down future earnings.

The price of iron ore matters a lot

But there’s no denying the price of iron ore affects BHP’s trading outcomes. Last year, the firm’s iron ore operations delivered around 70% of overall underlying earnings. But after peaking around May 2021, the iron ore price is around 45% lower than it was then. I think it likely analysts have been factoring in lower iron prices when making future profit assumptions.

And that’s one of the big uncertainties when considering mining stocks — the industry is highly cyclical. But right now, BHP is trading with a forward-looking earnings multiple of just over 12 for the trading year to June 2023 and the expected dividend yield is around 6%.

That valuation doesn’t look too demanding, and there’s potential for the price of iron ore to recover, thus boosting forward earnings. However, the share price has already risen by about 30% since mid-November 2021. And that move could be due to an investor reaction to inflation and the beginning of a recovery for iron.

On the balance of considerations, I’m happy to keep BHP on watch for the time being while waiting for dips, down-days and a better-value entry point.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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