After dropping 16% in one month, is BHP (ASX: BHP) stock price now a buy?

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The BHP Group Ltd. (ASX: BHP) The stock price has fallen 16% over the past month. Could the resource giant be a buy after the fall?

BHP shares have indeed fallen by 30% since August 4, 2021.

Could the resource giant be an opportunity?

Broker Morgans currently has a hold rating on BHP, with a price target of $ 45.20. This suggests that BHP shares could rise by around 20% over the next 12 months.

Morgans believes there will be lingering problems with the price of iron ore. Even before Evergrande’s problems arose, media such as the Australian Financial Review that China was seeking to reduce its steel production.

It was reported a few weeks ago that Chinese officials were telling steel mills to slow production, which could in part reduce emissions for the Beijing Winter Olympics. The AFR also signaled that production cuts could last until March of next year.

How much reduction? China is targeting 2021 production identical to that of 2020, which represents a significant reduction as the first half of 2021 saw much higher production than the first half of 2020.

What is the valuation of the BHP share price?

FY 22 includes the first few months when the price of iron ore is extremely high. This is partly why Morgans places the current BHP share price at just 7 times the estimated FY22 earnings. The broker estimated that in the current fiscal year, the resource giant will pay a gross dividend yield of just over 14%.

But profits are expected to fall in FY23 as iron ore prices drop. Morgans figures put the current BHP share price at around 10 times the 23’x estimated earnings. Fiscal year 23 could be accompanied by an increased dividend yield of 8.9%.

As the price of iron ore drops, the broker finds that high coal prices are helping to limit the damage from falling iron prices.

Potash exposure

BHP recently made a presentation to investors on its Jansen potash project.

The resource giant said it was an attractive, forward-looking commodity. The mining giant said it was a global trend, with low-emission, biosphere-friendly fertilizer. BHP said Potash has attractive fundamentals, it is a supply driven market with reliable base demand and attractive upside. BHP says potash is not strongly correlated with broader economic and commodity cycles.

This potash project will increase BHP’s diversification in commodities, customer base and operational footprint. It is a long-lived asset in a stable mining jurisdiction. Potash also provides a platform for growth through potential “capital-efficient” expansions.

BHP estimated that it could achieve an underlying profit before interest, taxes, depreciation and amortization (EBITDA) of around 70%, generating an internal rate of return between 12% and 14%.

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