As we seek to electrify everything, from power generation to transportation, copper is the one material that’s used everywhere in the energy transition, observes Tony Daltorio, growth stock expert and editor at Investor's Alley.
Copper’s essential role in electrical wiring, grid infrastructure, wind turbines, and electric vehicles makes it indispensable for the energy transition.
Demand for copper could rise to 40 million tons a year by 2030, up from 25 million tons a year in 2021, according to estimates from S&P Global. Given that it takes up to a decade to open a producing copper mine, the coming shortfall is inevitable.
However, much of the world’s most accessible, high-grade copper deposits have already been mined. The stark reality was laid out by S&P Global, which stated that most of the copper that’s being produced currently comes from assets that were discovered in the 1990s!
That leaves relatively few high-quality copper resources still available, with the easiest way to find such resources on the stock market and not through exploration. That has led to fierce competition among the major miners for these dwindling resources.
Among the major miners, my top choice remains BHP Group (BHP). The company mines copper, silver, zinc, molybdenum, uranium, gold, iron ore, as well as metallurgical and thermal coal. It also is involved in mining, smelting, and refining of nickel and potash production.
Most of its revenues come from assets in the relative safe havens of Australia, North America, and Europe. To say the least, the company — the world’s biggest mining company, as measured by market capitalization — is doing quite well.
Adjusted free cash flow in fiscal year 2022 totaled $24.3 billion (a new record year) and up from the previous record of $19.4 billion, set in the 2021 fiscal year. That has allowed BHP to pay down its debt — net debt of $333 million, as of June 30, 2022, is down from more than $20 billion in the 2016 fiscal year.
This puts BHP in a position to weather economic cycles — especially since its generally low-cost, high-quality assets mean the company is one of the few miners that can remain profitable through the commodity cycle.
Despite weak output from its flagship Escondida mine in Chile, BHP management maintained copper guidance, given the strong performance of the company’s other copper mines. BHP’s copper division accounts for about 20% of the miner’s forecast earnings.
The company is paying a fair price for Oz Minerals; with net debt of about $7 billion — around 0.2 times its EBITDA (as of the end of December 2022), BHP can easily afford the $6.6 billion price tag. This offer is a bet on copper as well as nickel, with continued confidence in Australia’s relatively stable geopolitics.
BHP shares have rallied by 17% over the past six months. I expect more to come. While its dividend will not be as massive as it had been over the last year or two, BHP will still treat shareholders generously. The current dividend yield of 8.8% is nothing to sneeze at. The stock can be bought anywhere in the low $60s per share.
