BHP Group (BHP) is returning a record amount of cash to investors as surging coal prices helped the world’s biggest miner deliver a 26% increase in annual profits.

The company and its shareholders are grateful it hung on to some of its coal assets. That kept BHP’s cash profit climbing in the 2022 financial year, even though copper and iron ore prices came down.

Its underlying cash profit for the year of $40.6 billion was 16% ahead of last year and almost double the 2020 financial year, when iron ore prices were soaring. Underlying profit from continuing operations—a key measure for mining companies—rose 26%, to $21.32 billion, on revenue up 14% to $65 billion in the year to June.

BHP ended the year with net debt of just $333 million, significantly below its $5 billion to $15 billion target range. Over the year, the company generated more than $24 billion of excess cash.

Thanks to the war in Ukraine, coal prices have soared in 2022 around the globe.

BHP is the largest seaborne producer of metallurgical coal (used to make steel) in the world, and it also owns a large thermal coal mine in New South Wales. The company’s high-quality Queensland metallurgical coal operations are some of the lowest cost coal operations globally. Queensland Coal accounts for the vast majority of EBIT in BHP’s coal segment.

The coal division drove BHP’s record underlying cash profit. Coal contributed $9.5 billion in Ebitda, compared to a mere $288 million last year. Underlying earnings from the coal division before interest and tax came in at $8.7 billion against a loss of $577 million a year, as coal prices soared.

High coal prices also drove the company’s dividend. BHP declared a final dividend of $8.9 billion, or $1.75 per share, taking total payments for the year to $16.5 billion, or $3.25 a share (a payout ratio of 77%). That is the highest total disbursement in BHP’s 137-year history!

BHP said shareholder payouts in 2022 were close to $36 billion, including the shares in Woodside Petroleum (WDS) given to its shareholders in exchange for the sale of its petroleum division. Holders of BHP American depositary shares (ADSs) were entitled to receive one Woodside ADS for every 2.7670 BHP ADS they held.

BHP’s Transformational Year

The bumper payout to shareholders in 2022 is just part of a transformational year for the company. It also had the aforementioned spin out of its oil and gas operations, unified its share structure in Australia and approved development of a huge potash project in Canada.

BHP’s CEO Mike Henry has also begun to increase BHP’s exposure to faster growing resources that will be in demand as the world seeks to decarbonize. He said the company had “improved its platform for growth” during the year, with the green light for the Jansen potash project in Canada. Management approved a $5.7 billion investment in the Jansen Stage I potash mining project in Canada. BHP now expects to begin production of potash there in 2026 rather than in 2027.

And it committed to copper, nickel and iron ore expansions on top of some coal asset sales.

On the decarbonization theme, consider nickel. BHP had previously planned to sell its Nickel West operation in Western Australia. But now, it has refashioned it as a growth division, with customers including Tesla. Exploration spending by BHP on nickel is at its highest level since 2005. It already has a large potential deposit of nickel on a nearly 100-mile strip in Western Australia acquired from Russia’s Norilsk Nickel in 2020.

Another example of its decarbonization metals commitment was BHP’s $5.8 billion offer for Australia’s OZ Minerals (OZMLF). OZ rejected the offer, though, as “significantly” undervaluing the company.

But it would not be surprising if BHP came back with a higher offer that OZ accepts.

BHP has the balance sheet capacity to be able to develop all of OZ Mineral’s growth projects. And the deal would be complementary, with OZ’s Carrapateena and Prominent Hill mines being in close proximity to BHP’s Olympic Dam complex and Oak Dam deposit.

What’s Next for BHP

So, what comes next for BHP?

Looking ahead, the cash profit margin (one percentage point higher than last year at 65%) will come under pressure from inflation pushing up costs at its mines.

The company has guided to a 10% cost increase at its huge iron ore operations, based mainly on higher labor and diesel costs. Production will largely be flat on 2021 and 2020, although the company is pushing ahead with plans to get it from around 280 million tons a year to over 300 million tons.

Spending will go up as a result, with the guided 2023 capital expenditure of $7.6 billion well ahead of some Wall Street forecasts of $5.9 billion.

There is no doubt BHP will take a hit from higher costs. But its high profit margins and almost net cash position mean it is in good shape for a period of weakened industrial metals prices from an economic slowdown.

In simple terms, BHP’s low-cost, high-quality assets mean it is likely to be one of the very few miners that remains profitable through the commodity cycle. That translates to a relatively safe semiannual dividend—thecurrentyield is in excess of 11%! That may drop somewhat, but the yield should remain in the high single digits, near 10%, for a while.

In looking at its stock performance, BHP has risen 123% over the past five years. That compares to a gain of 92% for the S&P 500 index. The stock is a buy anywhere in the $55 to $60 range.