BHP's BHP fiscal 2025 guidance is reiterated, with iron ore and copper starting the year solidly. First-quarter sales from Western Australia Iron Ore of 63 million metric tons align with last year. Copper sales of around 390,000 metric tons are up 22%, driven by its 58%-owned Escondida mine.

Why it matters: While early in fiscal 2025, production is in line with our expectations. Our volume and earnings forecasts are broadly unchanged. We expect BHP's share of Western Australia iron ore ("WAIO") sales to be about 255 million metric tons in fiscal 2025, similar to last year, with unit cash costs of about USD 19.20 per metric ton. This is 6% higher than in fiscal 2024 due to inflation and is toward the top end of guidance. Our forecast is for copper sales of around 1.4 million metric tons in fiscal 2025, a 5% increase driven by Escondida. We expect Escondida unit cash costs of about USD 1.55 per pound, also near the top end of guidance.

The bottom line: We retain our fair value estimate of $39 per share for no-moat BHP. Higher near-term iron ore and copper prices driven by China stimulus are likely why the shares trade at 12% above fair value.

Long view: We expect modest volume gains longer-term and forecast WAIO sales rising to about 270 million metric tons—BHP's share—by fiscal 2029, up 6% on fiscal 2024. We also expect a similar increase in equity copper sales to about 1.48 million metric tons in fiscal 2029. Iron ore and copper comprise the vast majority of our forecast midcycle EBITDA of about USD 22 billion in fiscal 2029, down around 25% on fiscal 2024 driven by lower prices.

Bulls say: Our bull-case fair value estimate is $51. This assumes iron ore and copper prices over our forecast period are roughly 20% higher than in our base-case scenario, partially offset by higher unit cash costs. Our bull case assumed midcycle iron ore and copper prices from 2028 are about USD 85 per metric ton and USD 4.40 per pound, respectively, compared with around USD 70 and USD 3.65 in our base case.

Business strategy and outlook

BHP is the world’s largest miner by market capitalization. Its main operations span iron ore and copper, with smaller contributions from metallurgical coal, thermal coal, and nickel. The company is also developing its Jansen potash project in Canada. BHP merged its oil and gas assets with Woodside Energy in June 2022, vesting the Woodside shares it received to BHP shareholders, and exiting the sector. It purchased copper miner Oz Minerals in fiscal 2023.

Commodity demand is tied to global economic growth, China’s in particular. BHP benefited greatly from the China boom over the past two decades. China is BHP's largest customer, accounting for roughly 60% of sales in fiscal 2024. With demand for many commodities likely to soften as the China boom ends, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment, we think the outlook is for earnings to materially decline.

Its generally low-cost, high-quality assets mean BHP is likely to be one of the few miners that remains profitable through the commodity cycle. Much of the company's operations are located close to key Asian markets, particularly the low-cost iron ore business, providing a modest freight cost advantage relative to some producers such as those in Africa and South America.

BHP correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification. Much of its revenue comes from assets in the relative safe haven of Australia. The development of Jansen in Canada is BHP’s major expansion project, with the company also pursuing modest expansion of its Western Australia Iron Ore operations above 290 million metric tons per year.

The good times during the height of the China boom saw significant capital expenditure, notably on iron ore and onshore US shale gas and oil. Overinvestment in the boom diluted returns to the point where we struggle to justify a moat. As a commodity producer, BHP lacks pricing power and is a price taker.

Moat rating

As a commodity producer, BHP is a price taker and needs low-cost mines with long lives and a low installed capital base to support the longer-term excess returns needed to justify an economic moat. We forecast midcycle returns on invested capital in the low double digits compared with its weighted average cost of capital of around 9%, primarily driven by BHP’s moaty iron ore and copper segments, which account for the vast majority of midcycle EBIT.

Our forecast is based on assumed midcycle prices from 2028 of USD 70 per metric ton for iron ore (which is materially less than the average price of around USD 95 per metric ton over the past decade), roughly USD 3.65 per pound for copper, around USD 155 per metric ton for metallurgical coal and around USD 105 per metric ton for thermal coal, based on our estimates of the marginal costs of production. As we think BHP’s midcycle ROIC isn’t sufficiently above its WACC to justify assigning a narrow moat, we don’t assign the company a moat.

In calculating ROIC, we have added back to invested capital roughly USD 12 billion in asset and intangibles write-downs taken over the past 12 years on the basis that these amounts relate to assets developed or acquired in the ordinary course of business and so should be included when calculating ROIC. Some of the more material amounts include USD 4.6 billion in relation to its nickel business, USD 2.2 billion in relation to energy coal, and USD 1.8 billion in relation to potash. However, we have not added back USD 11.6 billion in relation to BHP’s oil and gas businesses as the company has since exited the sector and these acquisitions were made by previous management which has since been replaced.

Looking at each of BHP’s segments in turn:

Iron ore (narrow moat): BHP’s Pilbara iron ore assets have cash costs in or around the lowest quartile of the cost curve, in line with Rio Tinto's. In comparison to peers such as Rio and Vale, however, who expanded much more aggressively during the last iron ore boom, BHP also benefits from having a sizable portion of its iron ore assets built prior to the boom at much lower unit rates. Port, rail, and mine assets are fully integrated, benefit from scale, and are favorably located in key Asian markets. New mines are periodically developed to continue to feed and utilize the installed infrastructure base, with incremental capacity able to be added for very low capital costs through incremental expansions and efficiencies, including innovative technology such as automated haulage. We estimate that iron ore will produce around half of midcycle EBIT and generate a midcycle ROIC of roughly 30% in fiscal 2029, materially above BHP’s WACC of around 9%. As such, we consider BHP’s iron ore business moatworthy.

Copper (narrow moat): Led by its Escondida, Pampa Norte, and Antamina mines, BHP’s overall copper production sits comfortably within the bottom half of the cost curve. At our forecast midcycle copper price of roughly USD 3.65 per pound from 2028, we forecast the copper segment will produce around 45% of midcycle EBIT and generate a midcycle ROIC of about 13% in fiscal 2029, comfortably above BHP’s WACC of around 9%. As such, we also deem BHP’s copper business moatworthy.

Coal (no moat): BHP is the largest seaborne metallurgical coal producer in the world, with its high-quality Queensland Coal operations sitting in the second quartile of the cost curve. This segment also includes BHP’s remaining thermal coal operations at Mount Arthur, which are due to close in 2030. At current prices, segment returns are attractive. However, we forecast low-double-digit midcycle ROIC from fiscal 2029, based on our assumed midcycle prices for metallurgical coal of around USD 155 per metric ton and for thermal coal of about USD 105. As this isn’t sufficiently above BHP's WACC, we don’t deem the coal segment to be moatworthy.

Other (nickel, potash) (no moat): BHP’s nickel business is struggling as a result of low nickel prices and an inflated capital base, and it is being placed into care and maintenance in late 2024. While we assume a 50% chance it restarts by midcycle in fiscal 2029, and higher nickel prices are a potential tailwind, we think the nickel business’ inflated capital base makes it unlikely that it will generate above-WACC returns. In addition, while BHP’s Jansen potash project is likely to be in the lowest quartile of the cost curve once complete, the substantial capital expenditure of USD 4.5 billion invested to date plus the additional USD 11 billion investment to complete the project means we think that it is also unlikely to generate ROIC above WACC for more than a decade.

Exploration projects (no moat): These are an immaterial part of BHP and way too early in their potential development to assign any of them a moat.

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