Three Reasons BHP Is Undervalued (None Are Iron Ore)

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By Mark Gardner, CEO, Head of Equities, MPC Markets

Over the last decade, BHP Group ((BHP)) has been planning for a future beyond iron ore, and that future is rapidly unfolding, driven by the things we will need most: energy and food.

One of the largest demographic shifts in human history is already in motion, moving from rural to urban environments. This means two things: we are going to need more energy, and we will need to increase agricultural productivity. BHP recognizes this.

In recent years, BHP has focused on developing energy transition minerals like copper and uranium, while also advancing its first major potash project, all three addressing these needs.

Copper: The Perfect Storm

Copper is integral to numerous industries, particularly those associated with the energy transition and the rapidly expanding artificial intelligence (AI) sector. BHP, being one of the world's largest copper producers, is ideally placed to capitalise on the burgeoning demand for copper.

Demand Drivers:

–Energy Transition: The global shift towards renewable energy sources and electric vehicles (EVs) is a significant driver of copper demand. Copper is essential for the infrastructure of wind turbines, solar panels, and EVs. The share of global copper demand from "green" sectors is expected to double over the next decade, from about 8% to 16%.

–AI and Data Centers: The rise of AI and the proliferation of data centres have created a new and substantial demand for copper. Data centres, essential for AI operations, consume vast amounts of copper. For instance, Nvidia's GPU data centre sales have surged by 409% in the last year alone, with further growth expected.

Supply Constraints:

-Projected Deficit: According to a Reuters survey, global copper demand is projected to hit -6m tonnes in 2024, with a market deficit expected to exceed -100,000 tonnes in 2025. This deficit is likely conservative, given the additional demand from AI and data centres. Chief Economist at Trafigura, Saad Rahim, has highlighted a projected increase in copper demand by one million tons due to AI and data centres, exacerbating an already significant deficit.

-Geopolitical and Production Issues: Copper supply is heavily dependent on South America, where geopolitical risks and production disruptions are significant concerns. Major producers like Codelco, MMG, Glencore, and Antofagasta have all reported production declines or disruptions, further tightening supply.

-Inventory Levels: Global copper inventories are at 30-year lows in terms of days of demand. Without new significant supply coming online in the next two years, prices are likely to remain highly sensitive to supply gaps.

-Lack of New Mines: The motivation to explore new copper deposits has been low due to relatively stable prices compared to other battery minerals. Even with technological advancements in exploration, it takes an average of 15 years to open a new copper mine from discovery to production.

Uranium: Rising Demand Amidst Supply Constraints

BHP also stands to benefit from the rally in uranium prices. The company sits on the world's largest uranium deposit at Olympic Dam and is well-positioned to capitalise on the increasing demand for uranium driven by the clean energy transition.

Demand Drivers:

–Nuclear Power Expansion: With 22 nations, representing 43% of the global economy, committing to tripling their nuclear power capacity by 2040, the demand for uranium is set to soar. Nuclear energy is crucial for reducing carbon emissions, and this expansion will require significant amounts of uranium.

–Price Rally: The price of uranium has risen from US$50 a pound in 2023 to over US$90 a pound this month. With supply gaps expected to snowball in 2024, further price increases are anticipated. BHP, producing 3,406 tonnes of uranium in FY23 (a 43% year-on-year increase), holds a significant share of the global uranium production market.

Potash: Meeting the Rising Demand for Fertilisers

BHP's entry into the potash market is another strategic move that could drive its stock to new heights. Potash is a critical ingredient in fertilisers, and the demand for it is expected to rise significantly due to global demographic changes and urbanization.

Demand Drivers:

–Population Growth and Urbanisation: Although global population growth has slowed, the demand for resources continues to rise. Urbanisation is leading to increased energy consumption and a higher demand for agricultural products. Over the next three decades, two billion people are expected to move to urban areas, increasing the need for food and housing.

–Agricultural Productivity: Fertilisers, including potash, are essential for enhancing agricultural productivity. The demand for key fertiliser ingredients like sulfuric acid is expected to grow at an 8.3% compound annual growth rate (CAGR) over the next decade.

The confluence of rising demand and supply constraints in these critical commodities creates a favourable environment for BHP's growth.

As the world navigates through energy transitions, technological advancements, and demographic shifts, BHP's diversified portfolio and leadership in these markets make it cheap in anyone’s language and the old “it's just an iron ore miner” tag may soon be left behind.

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