Chart of the Week: BHP’s valuation hits historic levels
BHP and peers are trading as if the copper boom is here to stay.
Mentioned: BHP Group Ltd (BHP)
This week’s insights come directly from Lochlan Halloway in the Your Money Weekly “Priced for a Copper Supercycle”.
BHP trading at “China boom” multiples
BHP (ASX.BHP) trades on four and a half times book multiple. Assume a standard set of assumptions for a perpetuity model: a 9% cost of equity, long-run growth of about 3%, and a business that distributes most of what it earns, and that multiple requires BHP to earn about 30 cents on every dollar of shareholder capital.
While it doesn’t need to hit 30% return every year, Lochlan notes that is roughly where it must average out. A phenomenal long-run rate of return, especially when you consider the miner achieved a return on equity of 27% last fiscal year amidst very, very favourable conditions.
The whole sector has re-rated, not just BHP
Lochlan highlights that at four and a half times book mutliple, the underlying assumption is that copper holds near today’s levels for years, and that BHP averages returns of something like 30 cents on every dollar of capital into perpetuity. And this doesn’t just pertain to BHP.
Take a sample of major global miners with meaningful copper exposure, and every one of them is trading well above its long-run median valuation. It’s not enough to be right on the favourable tailwinds for copper. The price you pay for that growth matters too.
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.
