The BHP (ASX:BHP) share price has just hit a multi-year high

Here's why the BHP Group Ltd (ASX:BHP) share price hit a multi-year high on Monday…

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The BHP Group Ltd (ASX: BHP) share price was on form again on Monday.

At one stage, the mining giant's shares charged as much as 3% higher to a new multi-year high of $42.78.  

When the BHP share price reached that level, it was up a sizeable 19% since this time last month.

Why is the BHP share price at a multi-year high?

Investors have been buying BHP's shares over the last few weeks thanks to a rise in commodity prices.

This appears to have positioned the Big Australian to deliver another bumper profit result in FY 2021.

What has been happening?

The first commodity of note is oil. Last week oil prices climbed higher again, which led to WTI and Brent prices recording their fifth consecutive week of gains. This bodes well for its petroleum operations.

Also rising was copper. The base metal extended its year to date gain to over 24% last week, taking the price of the industrial metal to a seven-year high.

But the commodity that is getting investors the most excited is iron ore. Given how much the steel-making ingredient contributes to BHP's overall earnings, favourable iron ore prices are always good news for the mining giant.

According to CommSec, on Friday the spot iron ore price jumped a further 5.4% to US$145.30 a tonne. This was driven by news that Vale has downgraded its production guidance, leading to concerns that supply could be constrained at a time when demand is robust.

As a comparison, BHP has provided cost guidance of US$13 to US$14 a tonne for its iron ore operations. This means it will be generating significant free cash flow right now, which could lead to generous dividend payments next year.

Is the BHP share price in the buy zone?

It was largely because of this that this morning Macquarie retained its outperform rating and lifted its price target on BHP's shares to $46.00.

The broker has pencilled in a ~$2.78 per share fully franked dividend in FY 2021. Based on the current BHP share price, this equates to a 6.5% dividend yield.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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