BHP’s latest results offer a glimpse of what’s ahead
When the commodity cycle strikes back.
Mentioned: BHP Group Ltd (BHP)
BHP’s (ASX.BHP) latest earnings update had all the hallmarks of a strong result. Underlying net profit rose 30% and dividends jumped 65%. On the surface, it looks like a textbook example of a company firing on all cylinders. However, a closer look at what drove the result raises important questions about BHP’s valuation and the sustainability of its earnings.
Those questions centre on whether BHP’s current valuation can be justified by earnings generated during a period of unusually strong commodity prices. As the largest company on the ASX, its share price performance has direct consequences for most Australians, given BHP’s influence on super and index ETF returns.
Understanding the cycle
Ahead of the result, I sat down with our mining analyst Jon Mills to discuss what investors could expect from Australia’s mining goliaths, namely BHP, Rio Tinto and Fortescue. BHP was expected to hit all its straps in the result but the dividend was the key for Jon on how investors would react.
With copper and iron ore being BHP’s two core earnings drivers, cyclically high commodity prices meant the result would be strong. As such, the better-than-expected dividend payout we saw last week was not completely out of the question.
Unlike many businesses, BHP has little to no control over the prices for its products. In other words, mining companies are “price takers”. Whether its iron ore, copper or coal, the company’s profitability is often dictated by commodity markets.
That means earnings tend to be highly cyclical, rising rapidly when prices are elevated and falling just as quickly when the cycle turns. This is particularly relevant now with BHP’s recent earnings strength driven by copper. Copper prices on the London Metal Exchange have risen by 50% over the past 12 months. At USD 6.40 per pound, copper is closing in on historical highs.
At the peak of a commodity cycle, high prices encourage new supply and substitution by commodity buyers, which ultimately puts downward pressure on prices and industry profitability.
For investors, the challenge is estimating how much BHP can earn “through the cycle” over the next decade.
Why our valuation differs
A key reason why our fair value differs from the current price is based on how we value mining companies. The fair value does not assume today’s commodity prices persist indefinitely due to their cyclical nature.
Jon uses a midcycle commodity price assumption of USD3.80 per pound for copper and USD75 per metric tonne for iron ore, both well below current spot prices. Think of the midcycle price as an anchor point for long term valuation.
Rather than extrapolating today’s strong conditions into perpetuity, the midcycle assumptions are designed to reflect a more sustainable long-term environment. If you value BHP on current commodity prices alone, it risks overstating fair value in cycle peaks and under valuing the shares when prices are weak.
Based on the current midcycle prices, investors today appear to be pricing BHP at a significant premium. While strong commodity prices play a role in this, other factors such as increased passive flows from superfunds and ETFs as well as increased appetite for income shares may also be influencing the premium. Another argument is that the copper boom is driven by more structural demand from AI and cloud computing than “normal” cyclical supply and demand.
Copper remains key
BHP’s copper operations are led by the Escondida mine in Chile and Antamina mine in Peru. Copper is now the largest contributor to BHP’s earnings, closely followed by iron ore. Jon expects this trend to continue with copper generating more than half of midcycle EBIT through 2031. While BHP does not have an overall moat rating, its copper assets generate attractive returns and demonstrate moat worthy cost efficiencies.
The argument for BHP’s expansion in copper points towards the data center boom. Copper is being used in coolers and lighting, servers, network wiring as well as connecting data centers to power grids. In fact, the S&P Global estimates that data centers made up roughly 3% of total copper demand in 2025 and this could grow to 7% by 2035.
The argument that copper prices will remain high due to these structural changes in demand warrants a closer look. Jon is less convinced these drivers will have the impact the market is pricing in. The rollout of data centers for example, may be slower than the market expects due to community pushback, along with delays in construction and connection to the electricity grid.
Substitution and thrifting across the copper industry is also likely to offset much of the incremental demand from data centers. While the debate around AI and electrification attracts most of the attention, a more important driver of commodity demand is China.
Where China comes in
Prior to China joining the World Trade Organisation in 2001, global demand for most commodities was largely stable for decades. However, China’s economic reforms saw rapid demand growth for commodities such as iron ore and copper. Major miners such as BHP, Rio Tinto, Vale and Anglo American responded by dramatically increasing supply.
China is likely to remain the main source of copper demand, given its dominance of global fixed-asset investment in housing, infrastructure and manufacturing. In my previous chart of the week, we highlighted that almost all the growth in copper consumption from 2009 to 2020 came from China. China now has the highest copper demand of the major economies and accounts for more than half of global refined copper demand.
Our analysts see China’s transition to a more consumption focused, less commodity driven economy as a headwind for both copper and iron ore prices over the longer term. The key question investors must ask is how much of China’s copper and iron ore demand is driving commodity prices.
Wrap up
For investors, BHP’s latest result is a reminder that strong earnings do not always translate into attractive value. The key question for investors is whether today’s elevated commodity prices reflect a lasting structural shift in demand from electrification, AI and data centres.
Or whether this is simply another peak in the commodity cycle. The extent to which these emerging sources of demand can offset a slowing, less commodity-intensive China will largely determine whether BHP’s current premium to fair value remains justified.
