BHP's Western Australian Iron Ore sales of 64 million metric tons in second quarter fiscal 2025 are 3% up on the same quarter of fiscal 2024. First-half sales of 128 million metric tons are similar to last year. First-half copper sales of 730,000 metric tons are up 10%, driven by Escondida.

Why it matters: Production and cost guidance are reiterated, except for a modest reduction in production at the company's South Australian copper operations.
We forecast fiscal 2025 attributable copper sales volumes of around 1.4 million metric tons, similar to last year. We also still expect unit cash costs of about USD 1.55 per pound for Escondida.

We continue to forecast BHP's share of WAIO sales in fiscal 2025 to be around 255 million metric tons, about the same as fiscal 2024. Our estimate for WAIO unit cash costs of around USD 19.20 per metric ton is also unchanged and is a 6% increase on last year due to inflation.

The bottom line: Lower fiscal 2025 South Australia copper volumes are immaterial and we maintain our fair value estimate for no-moat BHP of AUD 40 per share. Shares trade close to fair value.

Key stats: Its average realized iron ore price of about USD 88 per metric ton is modestly below our assumption of USD 91 for fiscal 2025. However, we assume modestly higher prices over the remainder of the fiscal year based on the futures curve.

Long view: We expect iron ore demand from China to moderate in the longer term as steel production peaks and starts to decline as its economy moves from one reliant on fixed-asset investment to a more consumption-based economy.

China’s falling population and rising scrap-based production contribute to reduced demand for iron ore. We also think additional supply is likely, led by Simandou and Vale.

Hence, we expect a long-term price substantially below the current spot of around USD 100 per metric ton. Based on our estimate of the marginal cost of production, we assume a midcycle iron ore price of about USD 72 from 2029.

BHP's iron ore and copper mines performing solidly; Shares close to fair value

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.

BHP bulls say

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces.
  • BHP’s Jansen potash project gives it additional diversification, with potash being less correlated to the other commodities it produces.
  • BHP's iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

BHP bears say

  • BHP has shown improved capital allocation since its missteps during the China boom, but continuing high commodity prices could encourage it to once again aggressively expand output.
  • With its earnings dominated by iron ore and copper, structurally lower demand from China could lead to significantly lower earnings.
  • Resource companies could face growing sovereign risk as governments under fiscal pressure look to plug budgetary holes by taxing the industry.

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