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№ 003 25 filings · 2021-09-21 → 2025-08-22

BHP GROUP LIMITED

BHP
Basic Resources Market cap £147,365.4m
Fair value range 1,900–2,400p Mid case · £109,048m
Absolute upside -26% vs current market cap
Conviction 3/5 confidence in overvalued call
Supports the call
  • Exceptional disclosure and segment reporting
  • Multiple valuation methods converge on similar range
  • Consistent, audited financials with clear medium-term guidance
Limits the call
  • Highly sensitive to iron ore and copper price assumptions
  • Samarco contingent liabilities are unquantifiable tail risk
Methodology

Blended EV/EBITDA on mid-cycle earnings cross-checked with normalised P/E

In one line · bull case

World's largest diversified miner with the lowest-cost iron ore franchise and a credible copper/potash growth pipeline, but the share price already discounts a continuation of recent commodity strength.

In one line · biggest risk

Iron ore price normalising toward the US$80/t cost-support floor as Chinese steel production plateaus and new African supply arrives from 2026.

Drivers
AI exposure neutral
Cyclicality high
Moat wide
Leverage low
Earnings quality high
Management high
Trajectory stable
Value-trap signals · 4
  • Declining ROCE (26.4% to 20.4% YoY) while capex steps up
  • Net debt rising as EBITDA contracts
  • Dividend payout per share down ~67% over four years reflecting commodity normalisation
  • Queensland coal effectively in run-off due to royalty regime

BHP GROUP LIMITED (BHP) — Investment Research Note

Executive Summary

BHP is the world's largest diversified miner, producing copper (~39% of EBITDA), iron ore (~56%), and steelmaking coal/energy coal, with growth optionality in potash (Jansen, Canada) and copper (Vicuña JV, OZ Minerals/Copper South Australia). Across the five-year window covered, the trajectory has been: very strong FY21–FY22 (iron ore boom, peak underlying EBITDA ~$35bn FY21), softening in FY23–FY25 as iron ore prices normalised to the US$80–100/t range while copper volumes recovered (HY25 EBITDA $12.4bn, –11% YoY) 2025-02-18 half-year, 2022-02-15 half-year. The single most important point for valuation today is that BHP is moving from being primarily an iron ore cash machine to a more capital-hungry copper/potash growth company, with ~65% of medium-term capex earmarked for future-facing commodities and $10–11bn p.a. capex versus a normalised free cash flow that is sensitive to a softer iron ore price deck.

Fair Value Estimate

  • Fair value range: £19.00 – £24.00 per share (implied market cap ~£96bn – £122bn at ~5,072m basic shares outstanding 2025-02-18 half-year, EPS denominator).
  • Methodology: Blended EV/EBITDA on mid-cycle earnings, cross-checked with normalised P/E.
    • Mid-cycle Underlying EBITDA assumption ~$25bn (between trough HY25 annualised ~$24bn and peak FY21 ~$35bn) 2025-02-18 half-year; 2022-02-15 half-year.
    • Applied 5.5x – 7.0x EV/EBITDA multiple (consistent range for Tier-1 diversified miners with BHP's quality but cyclical earnings) → EV $137bn – $175bn.
    • Less net debt of $11.8bn (Dec 2024) plus Samarco-related obligations of $5.9bn (treated as debt-like; FY26e cash impact alone ~$3.9bn) 2025-02-18 half-year, note 9.
    • Equity value: ~$120bn – $157bn → at GBP/USD ≈ 1.27, £94bn – £124bn.
    • Cross-check P/E: HY25 underlying EPS 100.2¢ annualised ≈ 200¢ (~£1.58); at 12–14x → £19.0 – £22.0.
  • Comparison to current market cap of £147,365.4m: mid-point fair value ~£109bn implies the stock is trading ~26% above fair value.
  • Absolute downside: ~–26% (range: ~–17% to ~–35%).

Sector Context

  • Sector classification confirmed: Basic Resources / Basic Materials (Mining – Diversified).
  • BHP's quality/leverage profile is above typical sector peers: A1/A credit ratings, gearing 19.2%, net debt/EBITDA 0.4x, EBITDA margin 51% 2025-02-18 half-year. WAIO is the lowest-cost major iron ore producer globally (C1 $17.50/t). Growth profile is in line with peers (modest organic growth pivoting to copper).
  • Listed UK peers: Rio Tinto (most directly comparable diversified), Anglo American (more PGM/copper tilted), Glencore (commodity trading + coal/copper).

Investment Thesis (3 bullets)

  • Lowest-cost, long-life iron ore franchise underpins through-cycle cash generation. WAIO held its position as the lowest-cost major iron ore producer globally for the fifth consecutive year at C1 US$17.50/t, and has plans to grow to >305 Mtpa over the medium term with regulatory approval to expand to 330 Mtpa already obtained 2025-02-18 half-year; 2022-01-19 operational review.
  • Copper growth pipeline materially re-weights the portfolio toward future-facing commodities. Copper EBITDA contribution jumped to 39% of group EBITDA in HY25 (vs 25% prior year), with a $2.0bn Vicuña JV (Filo del Sol + Josemaria) completed Jan 2025, aspirations to grow Copper South Australia to >500ktpa, and Escondida growth options with attractive ~15–19% IRRs at consensus prices 2025-01-15 Filo acquisition; 2025-02-18 half-year.
  • Disciplined capital framework with consistent shareholder returns. ~$50bn returned to shareholders since 1 Jan 2021, including the HY25 interim dividend of 50¢/share at a 50% payout ratio; balance sheet remains conservatively geared with Moody's A1/Fitch A ratings 2025-02-18 half-year.

Key Risks (3 bullets)

  • Iron ore price risk as Chinese steel production plateaus. BHP itself flags China steel production has likely plateaued around 1Bt and pig iron output is expected to decline; new African supply (Simandou) is expected from 2026, with cost support estimated only in the US$80–100/t range. Realised iron ore price fell 22% YoY in HY25, taking $2.7bn off WAIO EBITDA 2025-02-18 half-year.
  • Samarco settlement obligations create multi-year cash drag. Confirmed ~$3.9bn cash outflow in FY26 and ~$1.6bn in FY27 (100% basis) for the ratified settlement, with secondary obligor exposure if Samarco cannot fund. Ongoing UK group action and Australian class action are unprovisioned contingent liabilities 2025-02-18 half-year, note 9.
  • Capital intensity is rising as iron ore tailwind fades. Group capex guided to ~$10bn in FY25 and ~$11bn p.a. medium-term, while ROCE has already fallen from 26.4% to 20.4% YoY; Western Australia Nickel suspended with $2.5bn impairment in FY24 illustrates execution/commodity-cycle risk on growth bets 2025-02-18 half-year; 2024-02-15 exceptional items update.

Value-trap Signals

  • Rising debt with declining EBITDA: Net debt up to $11.8bn from $9.1bn at FY24, while underlying EBITDA fell 11% YoY 2025-02-18 half-year. Not yet structural, but worth monitoring.
  • Falling ROCE (26.4% → 20.4%) at the same time capex steps up — classic late-cycle pattern for a miner pivoting from harvest to growth.
  • Queensland royalty regime has rendered BMA uneconomic for growth investment ("we will not be investing in any further growth at BMA"); coal is contracting 2025-02-18 half-year. Not a value trap per se but a permanent earnings pressure on the coal segment.
  • Dividend trajectory has declined materially: interim DPS 150¢ (Feb 2022) → 90¢ (Feb 2023) → 72¢ (Feb 2024) → 50¢ (Feb 2025), a –67% reduction reflecting normalising commodity prices.

Conviction

Conviction: 3 (Moderate) — confident the stock is currently expensive relative to mid-cycle fundamentals, but valuation is highly sensitive to commodity price assumptions.

Anchors (support confidence):

  1. Disclosure quality is exceptional — segment-by-segment EBITDA waterfalls, unit cost reconciliations, sensitivity to FX, and explicit medium-term guidance.
  2. Multiple methodologies (EV/EBITDA on mid-cycle earnings, normalised P/E) converge on a similar fair value range of ~£19–24.
  3. Reliable, audited financials (EY) with no significant restatements over the period.

Limiters (reduce confidence):

  1. Cyclical earnings — a sustained iron ore price above $110/t or copper above $5/lb could justify materially higher valuation; the fair value is essentially a bet on mean reversion in iron ore.
  2. Samarco contingent liabilities (UK group action, criminal proceedings) are unquantifiable downside that could pressure valuation further.