BHP’s (ASX: BHP) March quarter Western Australian Iron Ore sales volumes of 59 million metric tons fell 4% on a year ago but fiscal year to date volumes of 187 million are flat. Driven by Escondida, fiscal year to date copper volumes of 1.1 million metric tons are up 16%.

Why it matters: Production and cost guidance ranges for iron ore and copper, the main drivers of earnings, are reiterated. Though Escondida and Pampa Norte production, and Copper South Australia unit cash costs, are now guided to be in the upper half of their respective ranges.

  • We still expect WAIO volumes in fiscal 2025 to be around 255 million metric tons (BHP’s share), about the same as fiscal 2024, and WAIO unit cash costs to be about USD 19.20 per metric ton.
  • We modestly raise expected fiscal 2025 copper volumes mainly due to solid performance from Escondida, but still forecast around 1.4 million metric tons, modestly higher than last year. Forecast Escondida unit cash costs are about USD 1.50 per pound, around the guidance midpoint.

The bottom line: The changes to our model are immaterial and our fair value estimate of $40 per share for no-moat BHP is reiterated. Shares are around 10% undervalued on concerns tariffs will lead to lower China economic growth and demand for commodities including iron ore and copper.

Big picture: We expect the effect of tariffs on BHP to be more indirect than direct. Potentially slower China economic growth is a risk to commodity demand given China accounts for about 75% of seaborne iron ore demand and more than half of global copper demand.

  • Though if tariffs slow economic growth both in the west and China, this will likely result in central banks cutting interest rates and governments engaging in fiscal stimulus to support their economies. Both actions would support near-term iron ore and copper demand.

BHP shares are cheap after recent falls

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 2024. 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 materially 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 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.

BHP 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.

BHP 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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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.