Better buy: Fortescue vs BHP shares

The ASX iron ore share segment of the market has some of the world’s leading businesses. In this article, I’m going to look at Fortescue Metals Group Limited (ASX: FMG) shares and BHP Group Ltd (ASX: BHP) shares.

It has been a fruitful time to own iron ore miners in the last few months as their share prices shot higher with the iron ore price fetching above US$120 per tonne. The last few years have seen strong dividends from both companies as Chinese demand had been strong enough for long enough to drive large profits in FY20, FY21, and FY22.

While both of these businesses have enormous Australian iron ore operations, it’s the new things they’re doing outside of Australian iron ore that make them particularly interesting to me. Knowing what the future businesses will look like could be what influences the market’s perception of the ASX iron ore shares in the future.

Expansion into Africa?

Australia and Brazil are the two iron ore powerhouses of the world. But the continent of Africa could soon be a third player in the global iron sector.

Fortescue is planning to get involved in that region with the Belinga iron ore project in Gabon. It will be a venture with African partners, including the Gabonese government which will own a minority of the business.

Fortescue shares got a boost after the company announced it had signed the mining convention which governs all legal, fiscal, and regulatory regimes. This includes early development for the production of up to two million tonnes per annum, while studies advance potential designs of a large-scale development in Gabon.

The ASX mining share said that the early-stage exploration of Belinga shows similar grade and scale characteristics to Simandou at a comparable stage. Simandou is a major planned iron project in Guinea, Africa in which Rio Tinto Limited (ASX: RIO) is also involved.

This could be a major boost for the Fortescue share price if it becomes a large, operational mine.

BHP shares are gaining exposure to decarbonisation commodities

While iron ore accounts for the largest portion of BHP’s profit, the mining giant also has exposure to copper and nickel. It has copper exposure in South America and Australia, and nickel operations in Australia.

The company is also expanding through the acquisition of OZ Minerals Limited (ASX: OZL), a major copper miner. Despite paying a sizeable premium to pre-bid OZ Minerals’ share price, BHP thinks it can extract a lot of synergies from the combination. Plus, it wants to grow its production of green commodities as the world is going to need significant copper, nickel, and other minerals to meet decarbonisation targets.

Copper is necessary for the electrification of cars, network grids, and so on.

BHP is also working on opening the Jansen potash project in Canada. Potash is seen as a greener form of fertiliser. This project could achieve high margins and have a mine life of many decades. It could also be a useful addition for BHP once operational.

Fortescue’s major green energy plans

Fortescue has a plan to be a leading producer of green hydrogen. It’s working with governments and organisations around the world to create a portfolio of green hydrogen-producing locations. Green hydrogen and green ammonia could be effective at replacing fuel for heavy machinery, aircraft, and boats.

Green hydrogen is produced by using renewable energy to separate hydrogen from water. European energy giant E.ON has already signed up to buy around a third of Fortescue’s green hydrogen production by 2030.

Fortescue also wants to become a global leader in advanced batteries.

Are Fortescue shares or BHP shares a better buy?

After the strong run of both ASX iron ore shares, I wouldn’t jump on either of them at the moment. A drop of around 20% from here could represent a good price for the long term.

According to Commsec, Fortescue could pay a grossed-up dividend yield of around 10% in FY23 and BHP could pay a grossed-up dividend yield of around 9%.

I think Fortescue is the higher-risk choice of the two due to its green energy plans, but I also think this has greater growth potential. It could be a leader in a large new market. That’s why I own Fortescue shares.

The post Better buy: Fortescue vs BHP shares appeared first on The Motley Fool Australia.

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More reading

• Own Fortescue shares? Here’s what the market expects from its half year results
• ASX 200 shares: How to invest $10,000 to get $910 per year in passive income
• Own BHP shares? Here’s what the market expects from its half year results
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• Why Morgans just added these ASX 200 shares to its best ideas list

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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