Is there another BHP on the ASX?

If there was a Hall of Fame for Australian companies, BHP (ASX: BHP) would have to be prominent. After all, the Big Australian has topped the ASX200 by market capitalisation for more than 75 years. That’s before you look at various records it has broken over time, such as biggest open cut mine blast in Western Australia, iron ore production, heaviest train or even a Chilean mining record with a 40.4% female presence in Chile.

But this is not a love letter to BHP, after all, times are changing.

BHP just announced a sharp fall in profits in February this year. It wasn’t all bad news, but we are facing into a more challenging environment for the miner.

As we start to see sentiment towards coal and iron ore change due to the green transition and changing priorities in China, can BHP hold its dominance? Or is there another miner in the wings ready to sweep up the charts in coming decades?

I spoke to Tyndall’s Brad Potter and Wilsons Advisory’s Rob Crookston for their views on whether BHP can continue to hold sway, what the outlook for mining means for Australia and where the next miner to reach ASX top 10 status might be hiding.

Source: Market Index

The big trends in mining

Though mining is seen as an older industry, it has had a renaissance of sorts off the back of drivers like the green transition and big tech trends. Rare earths, copper, lithium and nickel are essential components for semi-conductor chips and battery components, while iron ore is needed as part of the infrastructure. Previously out-of-favour uranium has also surged in recent times as uranium is viewed as a viable low-carbon energy alternative.

“Low carbon technologies are significantly more mineral intensive compared to traditional fossil fuels. For example, an offshore wind farm requires 9-10 times more mineral resources, while an EV requires six times more mineral inputs than a conventional car,” says Potter.

It’s no surprise therefore that some of the larger miners have looked to diversify their portfolios through a range of acquisitions, be it takeover of smaller miners or purchase of relevant projects.

For example, BHP’s acquisition of Oz Minerals saw it expand its copper capabilities, while Rio Tinto (ASX: RIO) purchased the Rincon project from Rincon Resources (ASX: RCR) in 2022 to expand into lithium production.

Potter notes that the green transition trend extends even into the way mining companies are operating now.

“Most mines are putting in wind, solar and battery power compared to the traditional diesel- or gas-powered stations,” he said.

Could Australia have gotten “lucky” again?

The old “lucky country” adage has always referred to Australia’s good fortune in being resources-rich – and oh how we flourished from coal and iron ore! As demand for iron ore began to wane from China, there were some concerns that Australia’s mining dependence was about to be its downfall.

Decarbonisation may be our saving grace.

“There is an abundance of natural resources in this country across a broad range of commodities. The development of the lithium sector in WA over the last 10 years to become the world’s top producer demonstrates the diversity of resources,” says Crookston.

Potter cautions that it is still early days for exploration for lithium and rare earths in Australia and our success in this space will require careful management from both the government and miners.

The risks to BHP in the outlook (aka can BHP retain top 5 positioning?)

Both Crookston and Potter believe BHP continues to be well-positioned going forward.

Crookston notes that the biggest challenge facing BHP at present relates to the slowing demand for iron ore from China, which is also dampening prices. However, he believes its strong fundamentals should support it.

“Their healthy cash flow and solid balance sheet will also support investments into other commodities, particularly copper. Diversifying into copper production will support BHP’s cash flow and we fully expect the company to remain a significant part of the ASX,” said Crookston.

Potter believes the challenge for BHP is evolving with the decarbonisation trend.

“For them to maintain position, they need to keep growing into those minerals with increasing demand. They are in a good spot with their huge reserves in copper, potash and uranium,” Potter said.

He notes it is interesting that BHP hasn’t expanded into lithium, unlike other big miners such as Rio Tinto.

In short, BHP isn’t going anywhere anytime soon – and that’s a position that the brokers generally agree with. Macquarie has an Outperform rating on BHP, while Goldman Sachs position it as a Buy. UBS and Citi hold Neutral ratings, while Morgan Stanley has an Equal-weight rating on it. You can hear directly from BHP's CFO David Lamont in this recent interview with my colleague Ally Selby.

The mining upstarts – who has what it takes to reach ASX top 20?

Potter says the best prospects to hit top status will be in miners who are in the ‘right minerals’ where demand is rising.

“Companies that have exposure into critical minerals and are low on the cost curve will do well in the future,” he said.

He points to lithium, uranium and rare earths as his top mineral picks to watch.

This view on the ‘right minerals’ is shared by Crookston.

He identifies Pilbara Minerals (ASX: PLS) as promising, noting that with a $12 billion market cap, it's not too far from the $20 billion in size a company would have to be to crack the top 20.

Pilbra Minerals' Ngungaju Plant | Source: Pilbra Minerals

Pilbara has been a popular lithium play for investors in the past few years and Crookston thinks its plans for a higher production base should support earnings and valuation in the next decade.

“I would not be surprised if we see some consolidation in the lithium sector over the next decade. PLS with its established market presence, is well-positioned to capitalise on this trend, getting bigger in the process,” Crookston said.

It's also worth highlighting that mining's renaissance, courtesy of the decarbonisation trend, has seen increased M&A activity in the industry. In some ways, this makes it harder to pick tomorrow's winners when cashed up giants like BHP and Rio Tinto are rapidly looking to diversify their lines. Australia also holds appeal internationally - you only have to look to the failed takeover bids from Albemarle (NYSE: ALB) for Liontown (ASX: LTR) as evidence.

But, M&A activity doesn't necessarily need to be a threat to investors - after all some fund managers even use this as a source of revenue when their smaller cap picks are taken over.

At the end of the day if you are looking for future winners, it's worth keeping in mind Crookston and Potter's suggestions: focus on the "right minerals" and consider production costs for the company. In the case of larger companies, it could also pay to consider how diversified the portfolio is.

This article first appeared on Livewire Markets.