BHP Group Ltd

BHP's fiscal 2026 underlying net profit after tax was up 30% on last year to USD 13.2 billion, or USD 2.60 per share, on stronger prices led by copper. Shares rose 3% as investors cheered the USD 0.99 fully franked final dividend per share, up 65%, and a 72% payout above the target minimum of 50%.

Why it matters: Total dividends of USD 1.72 were more than we expected on the higher payout, though the result was slightly weaker. However, unit cost and capital expenditure guidance was broadly as we expected, with production guidance unchanged. Our earnings estimates are little changed. We raise our DPS forecasts for fiscal 2027 through fiscal 2029 by an average of 9% on an assumed payout ratio of 60%, increased from 55%.

The bottom line: We raise our fair value estimate for no-moat BHP by 5% to AUD 46 per share due to the time value of money and BHP likely generating an additional USD 3.5 billion in proceeds from selling noncore assets. Foreign-exchange movements since our last update partially offset this. The LME copper price of around USD 6.40 per pound has risen by half over the last 12 months to near historical highs, causing shares to trade around 40% above our intrinsic assessment. They offer an unexceptional 3.4% fully franked forward yield. We think trade distortions caused by fears of higher US tariffs along with near-term mine supply issues will be resolved. We assume a midcycle price of about USD 3.80 from 2030 based on the estimated long-run marginal cost of production.

Big picture: The very strong copper price is incentivizing new supply, including from BHP. We forecast its share of copper volumes rising to around 1.55 million metric tons midcycle from fiscal 2031 from 1.3 million in fiscal 2027, as it expands production at its mines in Chile and South Australia.

Key stats: Its strong balance sheet means we think BHP can use cash flow and available debt facilities to fund volume growth while continuing to return cash to shareholders.

Net debt was just 0.3 times adjusted trailing 12-month EBITDA at the end of June 2026.

We think BHP's plans to modestly grow volumes at Western Australian Iron Ore to around 275 million metric tons (its share) by the end of the decade, from 255 million in fiscal 2026, are sensible. We prefer the company not pursue expansion beyond that, given our view that the iron ore price will decline to around USD 75 per metric ton midcycle from 2030 from around USD 95 now.

We now forecast WAIO unit cash costs of around USD 21 per metric ton, at the midpoint of guidance for USD 20.25-USD 21.75. This is up from USD 20.30 previously and USD 19.70 in fiscal 2026 due to foreign exchange and higher diesel costs.

Diversification into potash also seems sensible to us, but the Jansen project in Canada represents only around 5% of our fair value estimate. Copper and iron ore are likely to constitute most of BHP's earnings over our forecast period.

We raise our fair value estimate to USD 65 per ADR from USD 62 due to the time value of money and BHP likely generating an additional USD 3.5 billion in proceeds from selling noncore assets. Foreign-exchange movements since our last update partially offset this.

We assume iron ore averages about USD 100 per metric ton from 2026 to 2028 based on the futures curve. Our assumed midcycle price from 2030 is around USD 75 per metric ton then, 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 as steel production peaks and starts to decline 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 95 per metric ton.

Cuing off the futures curve, our assumed average copper price from 2026 to 2028 is about USD 6.00 per pound. 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.

Also based on the futures curve, we assume average 2026-28 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.

Our assumed average thermal coal price is around USD 125 per metric ton from 2026 to 2028 based on the futures curve. We assume a midcycle price of about USD 120 per metric ton from 2030 based on our estimate of the long-run marginal cost of production.

We assume prices of about USD 7.80 per pound nickel, USD 0.90 per pound lead, and USD 1.55 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.