BHP’s (ASX.BHP) 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 $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.

BHP’s fair value estimate raised, but strong copper bull market means shares are expensive

BHP is the world’s largest miner by market capitalization. Its main operations span iron ore and copper, with smaller contributions from metallurgical coal and thermal coal. It placed its nickel operations on care and maintenance due to low prices in 2024. BHP is also developing its Jansen potash project in Canada. It 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 and half of the Vicuña copper joint venture in fiscal 2025.

Commodity demand is tied to global economic growth, particularly China’s. 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 2026. But we think demand for many commodities is likely to soften as the China boom ends, particularly for iron ore, which has disproportionately benefited from the boom in infrastructure and real estate investment.

Its generally low-cost, high-quality assets mean BHP is likely to be one of the few miners that remain profitable through the commodity cycle. Much of its operations are 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 relatively safe haven of Australia. The development of Jansen in Canada is BHP’s major expansion project, while it is also looking to expand copper production. It is also pursuing modest expansion of its Western Australia Iron Ore operations above 305 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, it lacks pricing power and is a price taker.

Bulls Say

  • 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.

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 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.

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