The BHP Group Ltd (ASX: BHP) share price has pulled back somewhat from the fresh highs it reached in April.
On 9 April, the BHP share price rose above $40, its highest levels since the mining boom of 2011. It has since pulled back and is trading around the $37.80 mark. So how much upside is left in the share price? And more importantly, are BHP shares a buy at these levels?
BHP shares have certainly delivered a huge windfall over the past six months. Considering they were changing hands for just over $30 in late November, anyone lucky enough to buy in at those prices would be looking at a near 30% profit on today's levels, and more if they sold in early April. This doesn't include the March dividend of 78c per share (fully franked) either.
Why have BHP shares risen so much?
Like its fellow ASX iron miners, Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO), BHP has benefitted from a surging iron ore spot price. The price of iron ore has risen over 50% since November and is now trading around the US$100 per tonne mark.
This has seen the share price of all iron ore stocks surge, with Fortescue in particular making all-time highs. The Australian dollar also continues to crash below 70 US cents, which provides an additional boost to the profitability of our exports like iron.
BHP's cost of mining a single tonne of iron ore is $14.26 and as miners' costs of production are relatively static (and in BHP's case, extremely low), any rises in spot price over the cost of production increases profit exponentially.
Although the iron ore price rose almost 50%, BHP's profit margin from mining iron has risen almost 65% in the same period. This is the rocket under BHP's share price and will continue if the iron ore price can hold above this price floor.
Foolish takeaway
In my opinion, the market is not expecting the iron ore price to hold at these levels for the short-to-medium term, and this is why the BHP share price (as well as other ASX iron miners) has pulled back slightly. I think buying into iron companies at the present time is a risky move as there isn't too much upside left in the share prices, save for a further massive surge in the iron ore spot price. I would much rather wait for the price to fall before entering into a BHP position.
