Here’s why Goldman Sachs just upgraded BHP (ASX:BHP) shares to a buy rating

The BHP Group Ltd (ASX: BHP) share price has been a positive performer on Tuesday.

In afternoon trade the mining giant’s shares are up 0.5% to $37.46.

Why is the BHP share price pushing higher?

Investors have been buying BHP’s shares after it was the subject of a positive broker note out of Goldman Sachs.

According to the note, the broker has upgraded the company’s shares to a buy rating with a $40.10 price target.

This price target implies potential upside of 7% over the next 12 months excluding dividends. This return stretches beyond 12% if you include dividends.

Why did Goldman Sachs upgrade BHP’s shares?

The broker made the move after its commodities team lifted its iron ore price forecasts through to 2022.

It said: “Overall, although we are calling the market tightness and current prices to ease in 4Q20, but we are now more positive on the medium term outlook for iron ore.”

For the fourth quarter it expects an average price of US$105 per tonne (previously US$80), in 2021 it is forecasting an average price of US$90 per tonne (previously US$80), and in 2022 it expects an iron ore price of US$75 per tonne (previously US$70).

In addition to this, the broker believes BHP’s shares are good value at the current level.

It commented: “We upgrade BHP to Buy with a 12-m TP of A$40.1 based on; (1) valuation with the stock trading at 0.95xNAV (A$38.4/sh) and discounting long run iron ore of US$60/t (real), and best next 12-m FCF yield (10%) of the three majors on our base case estimates.”

Outside iron ore, it also has positive outlooks on other major commodities that BHP has in its product mix. These are oil, copper, and met coal, which it expects to account for 35% of operating earnings in FY 2021. It also likes the growth opportunities the miner has for these commodities.

Finally, it notes that BHP is trading at a premium to its global peers. However, it feels this premium should remain and sees more risks for rival Rio Tinto Limited (ASX: RIO).

It explained: “Since 2009 BHP has traded at a 0.5x multiple premium to key global mining peers, and we argue this multiple premium should continue to hold due to the diversification and stability of earnings and cash flow vs. peers. Also, we see elevated risk for RIO in the wake of recent events surrounding Juukan Gorge in the Pilbara. We believe RIO could see possible impact to future Pilbara approvals, production (both volume and product spec) and capex.”

I agree with Goldman Sachs on BHP and would be a buyer of its shares today.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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