BHP share price outlook, Citi says iron ore to average $100/t in 2020

How long can the good times last?

With mining giant BHP Group (BHP) deriving some 64% of group earnings (EBITDA) from its iron ore division in FY20 – the performance and price outlook for this mainstay commodity has likely been a key overhang in the minds of investors over the last year.

Iron ore prices have indeed remained elevated for some time now – broadly driven by supply issues stemming from Brazil’s iron ore complex. This has seen the commodity’s prices persistently trade above US$100 per tonne – driving free cash flow and earnings for Australia’s big three iron ore miners – FMG, Rio Tinto and BHP.

Highlighting this persistent strength, at the time of writing CME’s front-month iron ore futures contract traded at US$126.78 per tonne.

In spite of elevated commodity prices, BHP delivered a solid but not a revelatory set of full-year (FY20) results as part of Australia’s corporate earnings season.

Looking at the broad strokes of these results, BHP saw its underlying earnings (EBITDA) and profits after tax both come in lower, down 5% and 4%, respectively. The miner's full-year dividend also failed to live up to the levels achieved in 2019 – with BHP’s full-year FY20 dividend coming in at 120 cents per share – down 10% year-over-year.

BHP’s shares are down 7.68% in the last month.

Citi’s BHP share price and iron ore outlook

With iron ore prices continuing to trade above US$100 per tonne, analysts from Citibank have revised their assumptions around the commodity – expecting iron ore prices to average ~US$100 per tonne in 2020 and move only modestly lower next year, expected to average US$90 per tonne in 2021.

Longer-term the investment bank anticipates that iron ore prices will drift lower, dipping to US$80-75 per tonne across CY22-23.

These revisions were based on altered assumptions concerning China, with it being noted that:

‘Chinese steel demand for the next three years based on a projected continuation of credit easing and China’s heavier reliance on domestic investment for GDP growth over the upcoming years, with property, infrastructure and automotive sectors remaining key pillars for China’s economic growth.’

Interestingly, while Citi analysts expect these price forecasts to be accretive to BHP’s earnings – upgrading earnings (EBITDA) targets by 21%, 22% and 27% between FY21 to FY21 – the investment bank has retained its Neutral rating and $40.00 price target on the miner.

Looking forward, Citi expects BHP Group to pay a 165 cents per share dividend in FY21, and a 172 cents per share dividend in FY22.

While Citi analysts believe that BHP is a high quality company, the investment bank ultimately views Rio Tinto as a more favourable alternative, citing 'better prospects for cash returns' as the key reason.

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