BHP Group Ltd

Copper trades near historical highs at about USD 6.50 per pound, up 10% since our July 2026 update, given mine supply disruptions and tariff-related trade distortions. Zinc and aluminum prices are also stronger, though near-term iron ore futures are little changed.

Why it matters: We update our iron ore and base metals mining coverage fair values based on our latest commodity price assumptions.

The bottom line: No-moat Anglo American and Teck's fair values increase 13% to GBX 2,600 and USD 40.50, respectively, driven by stronger copper prices and an increase in our terminal enterprise value/EBITDA multiple to 6, from 5.5. No-moat Freeport-McMoRan's estimate rises 7% to USD 32. No-moat South32's fair value increases 5% to AUD 4.30 on stronger base metals prices. The higher copper price drives the 4% rise in no-moat BHP's estimate to AUD 48. Along with stronger aluminum and alumina prices, it also sees no-moat Rio Tinto's fair value up 4%, to AUD 130. But the stronger copper price is broadly offset by lower iron ore earnings on rising freight rates for no-moat Vale, whose estimate remains USD 15. Wide-moat Deterra and no-moat Fortescue and Mineral Resources' fair value estimates are also maintained at AUD 4.40, AUD 15.50, and AUD 74.

Key stats: Mineral Resources shares are in four-star territory after pulling back on the weaker lithium price. It also drives Deterra shares' 10% discount. But we view this as a short-term blip, immaterial to both miners' fair values, with our medium- and long-term assumed lithium prices retained. Vale shares also trade around 10% below our intrinsic assessment. But we think elevated freight rates reflect temporarily rising fuel prices given the Iran war. Uncertainty over the result of the Brazilian presidential election also weighs. While Fortescue is fairly valued, very positive copper sentiment driven by optimism over the energy transition and AI sees miners with significant copper exposure overvalued by between 15% and 120%.

Looking at the futures curve, our assumed average copper price from 2026 to 2029 is now about USD 6.50 per pound, up from around USD 6.00. We also now assume average aluminum prices of around USD 1.60 per pound from 2026 to 2029, up from about USD 1.50 previously and based on higher near-term futures since our July 2026 update.

Mine supply issues and solid demand support the zinc price. We now assume around USD 1.80 per pound from 2027 based on spot, up from USD 1.60.

Anglo's merger with Teck is dependent on China regulatory approval, which we think will likely be forthcoming over the next six months. Anglo Teck's copper mines led by Quellaveco, Collahuasi, Los Bronces, and Quebrada Blanca 2 mean its copper business will likely be placed around the middle of the second quartile of the industry cost curve. Copper will account for a majority of the combined group's earnings.

Given Anglo has sold or agreed to sell most of its lower-quality assets, including metallurgical coal, platinum group metals, nickel—and with diamonds likely to follow shortly—we think Anglo Teck is deserving of a higher terminal multiple than we have assigned to both Anglo and Teck previously.

But this is partially offset by Anglo's lower-quality iron ore business, which will likely comprise most of the rest of Anglo Teck's earnings and which is located in the fourth quartile of the industry cost curve. As such, Anglo Teck will likely remain a lower-quality business overall than BHP and Rio Tinto, given their generally higher-quality assets led by their iron ore mines in Western Australia and stakes in the Escondida copper mine. Rio's hydro-powered aluminum smelters in Canada are also located in the bottom decile of the industry cost curve.

We raise our fair value estimate to USD 67 per ADR, from USD 65, driven by stronger copper prices.

Looking at the futures curve, our assumed average copper price from 2026 to 2029 is now about USD 6.50 per pound, up from around USD 6.00. Based on our estimate of the long-run marginal cost of production, we assume a midcycle price of about USD 3.80 per pound from 2030.

We continue to assume iron ore averages about USD 100 per metric ton from 2026 to 2029 based on the futures curve. Our assumed midcycle price is around USD 75 per metric ton from 2030 based on our estimate of the long-run marginal cost of production. Solid demand from China, which accounts for around 75% of the seaborne iron ore trade, is supportive of near-term prices. However, longer-term, we expect demand from China to moderate on declining steel production as its economy moves away from one reliant on fixed-asset investment to a more consumption-based economy. China’s falling population, along with rising scrap-based production, also contributes to reduced demand for iron ore in our view. 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 90 per metric ton.

Based on the futures curve, we continue to assume average 2026 to 2029 prices of about USD 250 per metric ton for metallurgical or coking coal. Our assumed midcycle price from 2030 is around USD 200 per metric ton based on our estimate of the long-run marginal cost of production.

We now assume thermal coal averages around USD 140 per metric ton from 2026 to 2029 based on the futures curve, up from about USD 125. We assume around USD 120 per metric ton midcycle from 2030 based on our estimate of the long-run marginal cost of production.

We assume prices of about USD 7.40 per pound nickel, USD 0.85 per pound lead, and USD 1.80 per pound zinc from 2027, in line with spot.

We employ a 9.3% cost of equity, reflecting high cyclicality and operating leverage with moderate financial leverage. This drives an 8.1% weighted average cost of capital, assuming a long-run 30/70 debt/equity split, appropriate for a major mining company such as BHP. Our fair value estimate equates to an enterprise value/EBITDA exit multiple of 7.5 times.

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 8%, 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 2030 of about USD 75 per metric ton for iron ore (which is materially less than the average price of around USD 100 per metric ton over the past decade), roughly USD 3.80 per pound for copper, around USD 200 per metric ton for metallurgical coal, and about USD 120 per metric ton for thermal coal, based on our estimates of the long-run marginal costs of production. As we think BHP’s midcycle ROIC isn’t sufficiently above its WACC to merit a narrow moat, we don’t assign the company a moat.

In calculating ROIC, we have added back to invested capital roughly USD 11 billion in asset and intangibles write-downs taken over roughly the past decade 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 larger amounts include USD 4.6 billion in relation to its nickel business and USD 4.1 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.

Iron ore (narrow moat): BHP’s Pilbara iron ore assets have cash costs in or around the lowest quartile of the cost curve. 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 45% of midcycle EBIT and generate a midcycle ROIC of about 25% in fiscal 2031, materially above BHP’s WACC. As such, we consider BHP’s iron ore business moatworthy.

Copper (narrow moat): Led by its Escondida and Antamina mines, BHP’s overall copper production sits comfortably within the bottom half of the cost curve. We forecast the copper segment will produce more than half of midcycle EBIT and generate a midcycle ROIC in the low double digits in fiscal 2031, comfortably above BHP’s WACC. As such, we deem BHP’s copper business moatworthy.

Coal (no moat): This segment includes its high-quality Queensland metallurgical coal operations as well as its remaining thermal coal operations at Mount Arthur, which are due to close in 2030. We forecast midcycle ROIC from fiscal 2031 materially below its WACC. As such, we don’t deem the coal segment to be moatworthy.

Other (nickel and potash, no moat): BHP’s nickel business is struggling as a result of low nickel prices and an inflated capital base, and it was placed into care and maintenance in 2024. While we assume a 50% chance it restarts by midcycle in fiscal 2031, 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 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.

BHP is likely to increase copper production from existing as well as new mines such as Vicuña over the next decade.

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 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 copper and iron ore, 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.