We all know about miners hedging production. This is where they sell today what they’ll deliver in the future. It’s a great way to lock in prices and get upfront cash flow. But it’s seldom used these days, and when I ask gold miners if they’re considering a hedge with gold around $5,000, they all say no. Investors want full exposure to the gold price.
Another angle for miners is streaming, which is similar to hedging but with some tweaks. There’s an upfront payment; then, as the commodity is delivered over time, there will be further payments, usually a percentage of the current spot price. This again means a chunk of cash upfront and still some, albeit limited, exposure to the commodity.
Both hedging and streaming are used to lock in prices; they’re also used by smaller miners to get much-needed cash instead of raising it via share issues or debt.
This is why I was surprised to see BHP Group announce a streaming deal for its share of silver output from the Antamina copper-zinc mine in Peru. But digging into the deal, it is classic smart BHP capital allocation.
The company is a minority shareholder in the Antamina mine, and the focus really is on the copper and zinc. Silver is a byproduct. According to the deal, BHP will receive $4.3bn from Wheaton Precious Metals, which will take all of BHP’s share of silver produced by the mine (BHP’s share is 33.75%) until 100-million ounces have been delivered. Thereafter it will deliver 22.5% of silver for the remaining life of the mine. At the same time, BHP will also be paid 20% of the spot silver price for every ounce delivered.
The upfront consideration compares favourably with the consensus estimates of our entire share of Antamina
— CFO Vandita Pant
So BHP gets a large upfront payment and some upside on the silver spot price, and gets rid of a byproduct that is not its key focus. But perhaps the killer part of the deal is the comment from CFO Vandita Pant: “The upfront consideration compares favourably with the consensus estimates of our entire share of Antamina.” In other words, it sold the silver for the value of the entire mine.
This is in many ways what sets BHP apart from the other diversified miners. It’s a real expert at capital allocation, and maybe the missed merger with Anglo American was a blessing.
We also see this in its iron ore mining. It is a low-cost producer at about $17/t, though often at lower quality. BHP’s half-year December 2024 results statement said it estimates that three-quarters of high-quality iron ore has a cost base of around $90/t. So lower quality, but able to survive any price downturn, even a severe one.
This is what sets the stock apart from the other diversified miners and why it has delivered better returns over the past few decades.
The writer holds shares in BHP
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