BHP's BHP first-half fiscal 2025 NPAT of about USD 5.1 billion, or USD 1 per share, is down 23% from last year. Lower iron ore prices more than offset higher copper prices and volumes. The USD 0.50 interim dividend is down 31% on lower earnings and a reduced 50% payout ratio versus 56% last year.

Why it matters: Guidance is maintained but we assume a higher effective tax rate of 36% given the increased exposure to Chilean copper earnings led by 58%-owned Escondida. Our production and unit cash cost forecasts are broadly unchanged.

  • We still expect its share of Western Australian Iron Ore (“WAIO”) and copper volumes to be about 255 million and 1.4 million metric tons, respectively, in fiscal 2025, both similar to fiscal 2024.
  • Our assumed fiscal 2025 WAIO unit cash costs are about USD 19.20 per metric ton, up about 6% on last year due to inflation. We also still expect unit cash costs of about USD 1.55 per pound for Escondida.

The bottom line: We make no change to our $40 per share fair value estimate for no-moat BHP, with the shares close to fairly valued.

Long view: In line with medium-term guidance, we continue to forecast WAIO volumes rising to about 270 million metric tons (its share) in fiscal 2029, from 255 million in fiscal 2025. WAIO remains its most attractive business, generating ROIC in the mid-20s in 2029, far above BHP's WACC of about 9%.

  • This assumes iron prices of about USD 105 per metric ton fall to our assumed midcycle price of about USD 72 per metric ton from 2029 as investment activity in China slows, and with it demand for iron ore and prices. Additional supply led by Simandou and Vale is also likely.
  • We prefer BHP not consider further WAIO expansion to 295 million metric tons (its share). While the returns on incremental capital are still likely to be above its WACC, any additional production is likely to negatively affect long-term prices, affecting returns on its WAIO business as a whole.

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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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.