Solid start to fiscal 2026 for BHP
Production guidance is maintained by management.
Mentioned: BHP Group Ltd (BHP)
BHP’s (ASX: BHP) fiscal 2026 first-quarter Western Australia Iron Ore (“WAIO”) volumes of 62 million metric tons (its share) are similar to a year ago, though down 8% on the previous quarter. Copper sales volumes of 320,000 metric tons are 13% lower than last year, mainly due to temporary inventory build.
Why it matters: Management maintains production and unit cash cost guidance, and our estimates are unchanged. WAIO and copper volumes, the main drivers of earnings, are in line with our expectations, at roughly 25% of our fiscal 2026 estimates.
- Average realized iron ore and copper prices of USD 92 per metric ton and USD 4.60 per pound, respectively, are also similar to what we expected. Spot copper is now about 5% higher on solid demand and supply concerns as peers such as Freeport-McMoRan, Teck, and Codelco reduce guidance.
- Iron ore prices are also now modestly higher due to increased steel prices as China reduces excess steelmaking capacity
The bottom line: No-moat BHP’s shares trade moderately above our unchanged intrinsic assessment of $42.
Key stats: Our fiscal 2026 forecast for WAIO volumes of 258 million metric tons (its share) is slightly up on last year and in the top half of guidance. We forecast a 4% increase in unit cash costs, to about USD 19.25, also in the guidance upper half. Inflation more than offsets higher volumes.
- However, we expect copper volumes to fall 6%, to about 1.37 million metric tons due to lower grades at Escondida. Escondida’s expected unit cash costs are up 18% to USD 1.40 per pound.
Long view: Rising production at its South Australian copper mines more than offsets lower Escondida volumes over our five-year forecast period. We forecast a modest increase in copper volumes, to 1.4 million metric tons in fiscal 2030, and WAIO volumes of about 275 million metric tons then.
- But higher iron ore and copper volumes are more than offset by assumed lower prices. We forecast a negative 3% five-year EBITDA CAGR to fiscal 2030.
Business strategy and outlook
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 2025. 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 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 (100% basis) 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.
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.
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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