In the last six months, the BHP Group Ltd (ASX: BHP) share price has risen by around 30%. It has certainly been a great run for the ASX mining share – but is it a buy?
As Australia's biggest resources business, BHP benefits enormously from higher commodity prices.
The iron ore price has gone from around US$90 per tonne up to US$121 per tonne, according to Commsec.
When the price of a resource rises, it boosts revenue and usually adds even more to net profit after tax (NPAT) because the costs of producing the resource are largely fixed but the price for it has increased. That extra cash can flow straight to the bottom line.
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What's driving the BHP share price higher?
The mining giant is seemingly benefiting from the improving outlook for China. After a period of COVID-19 lockdowns, which limited economic activity, things are now looking more promising for a recovery. China's cities are open again.
A return to full economic activity could be good news for the demand for commodities like iron ore, copper, and nickel, which BHP supplies. That could also be good news for the BHP share price, which we're already seeing.
But China doesn't want to pay too much for iron of course. According to reporting by the Australian Financial Review:
China's state planner on Wednesday issued its third warning this month against excessive speculation in iron ore, adding it will increase supervision of the country's spot and futures markets.
Companies should not engage in price gouging and speculation, said the National Development and Reform Commission (NDRC), in a post on its official WeChat account.
So, the higher the iron ore price goes, the more pressure China could try to put on it and push the price of iron ore down.
Strong production continues
While BHP doesn't have much control over the resource price, it is responsible for the production. The company just released its production numbers for the period ending 31 December 2022.
For the half-year, copper production increased 12% to 834.4 kt, iron ore production rose 2% to 132 mt, metallurgical coal production rose 5% to 13.6 mt, energy coal production fell 24% to 5.5 mt and nickel production dropped 2% to 38.4 mt.
The company warned in the update that it's "seeing the impact of inflation" across its global supply chains, so it's focusing on productivity and costs it can control to limit the hit to profit margins.
But, BHP was optimistic in its comments about 2023. The ASX mining share suggested China could be a stabilising force for the demand of resources thanks to pro-growth policies, including in the property sector, and an easing of COVID-19 restrictions.
BHP noted that China is expected to achieve its fifth straight year of more than 1 billion tonnes of steel production.
Should investors buy right now?
The phrase "buy low, sell high" is a bit of a cliché. However, I think it's very relevant when it comes to investing in resource businesses.
It seems easy to buy shares when commodity prices are roaring and strong profit is likely. But, resource prices don't usually stay strong forever. Supply and demand can vary quite significantly. Just look at how things have plunged and soared for iron since 2015.
I don't think it makes a lot of sense to buy at the current BHP share price when it's close to its all-time high. Even if the company's dividend income could be strong this year.
In my opinion, the best time to buy BHP shares is when things look bleak and the outlook is pessimistic.
One leading investment bank, Goldman Sachs, has a neutral rating on the ASX mining share, with a price target of $48.10, according to Commsec. That implies a slight fall for the BHP share price over the next year.
