BREAKINGVIEWS-BHP boss makes gutsy case to have cake and eat it

By Antony Currie

MELBOURNE, Feb 17 (Reuters Breakingviews) - Who needs a mega-merger? On Thursday, CEO Mike Henry made the case for why BHP BHP.AX doesn't, pointing not least to a 22% increase in underlying earnings delivered in the six months to the end of December. Those numbers solidly back up a point he has been making for a while. More controversial is his argument that the multi-product miner ought to be valued more like a pure-play copper producer.

Henry is adamant that the "single biggest source of value we have" is its diversity of core assets - iron ore, copper, steelmaking coal and potash. The variety can both provide earnings stability when one metal is underperforming as well as lower overall costs thanks to economies of scale. Trouble is, shareholders tend to reward simplicity, especially when a market is hot, as copper currently is.

Granted, the $190 billion company is the world's largest excavator of the red metal. For the first time ever, it contributed more than 50% of BHP's EBITDA, replacing iron ore as the biggest earner. Moreover, its copper breakeven price is around $1.40 a ton compared to the average of $4 for more pure-play rivals like First Quantum Minerals FM.TO, BHP calculates. Yet such one-trick ponies are valued in the market at an average of 9 times EBITDA for the past 12 months. Even after a near-5% stock price jump on Tuesday, BHP sports a 6.6-times multiple.

Henry has shown his team knows how to extract value from BHP's assets, and not just in core earnings. On Tuesday the Melbourne-based miner also said it had struck a long-term supply deal for much of the silver that comes out as a by-product of the Peru copper mine it owns a third of. Wheaton Precious Metals WPM.TO, the world's largest precious metals streaming company, will pay $4.3 billion up front, which is just shy of what analysts value the copper mine at. So it's effectively free money, even before factoring in the 20% of the spot price Wheaton will pay on delivery.

Yet specialist copper producers warrant higher multiples not just because of their simplicity and their rising earnings. They also are more richly valued because miners, BHP included, keep talking about the desire to buy more mines, which adds a takeover premium to their shares. Henry makes a gutsy case for why BHP stock deserves a re-rating, but he can't have his cake and eat it.

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CONTEXT NEWS

BHP on February 17 reported underlying attributable profit for the six months to the end of December of $6.2 billion, a 22% increase from the same period in 2024. Revenue increased 11%.

On the same day the miner run by Mike Henry announced that it has entered into a long-term agreement to sell silver from the Antamina mine in Peru to Wheaton Precious Metals. Under the terms of the so-called streaming agreement, Wheaton will pay BHP $4.3 billion upfront and then 20% of the spot price for each ounce of silver upon delivery of the metal.

BHP's Sydney-listed shares closed up 4.75% at A$52.74, a record high.