BHP Battling Rising Costs, Production Challenges

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BHP Group’s fourth quarter operational report resulted in record iron ore and copper production for FY25. Weaker commodity pricing and delays at Jansen potash provided negative offsets.

-BHP Group’s record FY25 iron ore & copper production
–Jansen: delays and escalations cloud potash strategy
-Rising costs at WA iron ore, has copper production peaked?
-Ongoing downward pressure on dividends

By Mark Woodruff

Ahead of last week’s BHP Group ((BHP)) fourth-quarter operational market update, Morgans highlighted sector-leading balance sheet strength and attractive exposure to copper and potash, noting upside at the time was not yet fully reflected in consensus estimates.

Offsetting this assessment, the broker also felt near-term softness in iron ore pricing and a relatively full valuation limited near-term upside potential and thus recommended accumulating BHP stock on pullbacks.

UBS had also recently lowered its 2025/26 demand and price forecasts for key commodities, citing the anticipated impact of the ongoing trade war between the US and the rest of the world. Significant uncertainty remains around the broader implications for global growth and how China will respond, noted the broker.

Over the next six months, UBS sees downside risk to spot copper and iron ore prices as physical markets continue to soften.

Following release of the quarterly activities report, Morgan Stanley notes lower realised prices did indeed offset production beats across all businesses, leading to a neutral impact on this broker’s second half FY25 earnings forecast.

Unfortunately, there was also a cost blowout at the Jansen potash project in Canada, but (as explained later) some brokers take a positive view on deferred capital expenditure at a time of sliding profits and downward pressure on dividends. Back in February, the interim dividend was trimmed to an eight-year low.

Now the June quarter volumes are known, we know BHP delivered record iron ore and copper production in FY25. The WA iron ore (WAIO) operations set multiple records with the South Flank mine exceeding nameplate production capacity in its first full year of operation.

More than two million tonnes of copper have been produced across the group in FY25. In Chile, Escondida achieved its highest production in 17 years, while Spence also delivered record volumes.

Back in Australia, Copper SA finished the year strongly, with copper production records in June and for the June quarter.

Copper SA encompasses the Olympic Dam smelter and refinery, underground mines (Olympic Dam, Carrapateena, Prominent Hill), upstream exploration (Oak Dam), and downstream logistics (rail). 

The importance of iron ore and copper

In a recent interview with FNArena, Chief Financial Officer Vandita Pant noted BHP has “the best iron ore business in the world, which is our Western Australia iron ore business, operating at the lowest cost and highest coming from copper”.

Smaller contributions come from metallurgical coal, thermal coal, and nickel. The group’s coal operations are now focused on steelmaking (metallurgical) following recent divestments.

Fourth quarter met coal production lifted by 4% year-on-year to 5mt on improved truck productivity and strong performance across all open cut mines, explains UBS. Thermal coal production also increased 4% to 4mt, exceeding the top end of guidance.

Management said it remains on track to achieve FY25 unit cost guidance at Escondida, Spence, Copper SA and WAIO, though revised guidance at the BHP Mitsubishi Alliance, which produces met coal.

Compared to FY24, Citi highlights FY25 copper production and Western Australian iron ore (WAIO) rose by 8% and 1%, respectively. Now that a second concentrator at Samarco in Brazil has ramped-up, production of iron ore pellets rose by 34% in FY25.

Overall, Barrenjoey observed FY25 production results were largely at the top end of guidance ranges (Ord Minnett whitelabels their research), with FY26 production guidance largely in line with market expectation.

The net debt balance at year end is expected to be around US$13bn.

Copper

BHP produces copper from giant Chilean mines, Escondida and Spence, alongside newer South Australian assets.

UBS notes Escondida delivered its highest annual production in 17 years in FY25 at 1.3mt, despite a maintenance-related curtailment in June. Spence also achieved record output, while Copper South Australia met guidance despite a two-week weather-related power outage in 2Q.

This broker also believes FY26 guidance points to slightly weaker copper volumes year-on-year. Flat iron ore volumes and stronger metallurgical coal output were broadly in line with the broker’s expectations.

Barrenjoey sees FY26 guidance for copper as signaling FY25 is likely to mark the production peak, with future volumes destined to decline.

Management expects production to fall by -6% year-on-year due to declining grades in Chile, with further reduction projected for FY27. 

Barrenjoey suggests a recovery is unlikely until later this decade, contingent on the potential ramp-up of Copper SA and approval and development of the Josemaria copper project in Argentina.

Unit cost guidance remains broadly unchanged, Escondida at the low end, South Australia at the high end, explains UBS, while realised prices were strong in the quarter at US$4.43/lb.

Iron ore

The company shipped 287.6mt of iron ore in the year to June, flat year-on-year iron ore volumes.

Higher capex and delays at Jansen 

Management has increased the expected capital expenditure at Jansen by approximately -US$1.7bn to around -US$7.2bn.

As a result, the start-up of Stage 1 has been delayed by roughly six months. First production from the second stage is now expected in 2031 rather than 2029 and the -US$4.9bn cost estimate has been withdrawn pending further studies.

UBS explains the delay largely reflects industry wide real cost escalation, and changes to scope/design. No change has been made to nameplate capacities.

Despite these adjustments, this broker highlights FY26 capex guidance remains unchanged at around -US$11bn, in line with FY25 spend of circa -US$10bn.

Adopting a glass half full mindset, Morgan Stanley suggests the delay will allow higher spend in other parts of the business, likely copper.

Macquarie explains deferral of stage 2 adds back circa US$4.5bn into BHP’s capital allocation bucket this decade and the removal of circa -4.4mtpa of production should protect Stage 1 returns.

This broker notes -US$4.5bn has been spent to date, with a remaining -US$2.5-2.9bn required to complete the project by the end of FY27. While much of the cost overrun is already sunk, Morgan Stanley does comment the late emergence of the cost variance raises concerns about execution risk across BHP’s broader capital program.

Analysts at Barrenjoey suggest Jansen Stage 2 now appears uncertain as management juggles returns in the face of lower earnings and reduced free cash flow.

Management plans to provide an update on capex and timing for both Jansen Stage 1 & 2 in FY26.

Targets and Ratings

Six daily monitored brokers in the FNArena database conduct research on the Big Australian.

Given recent iron ore strength and BHP’s strong share price performance, Macquarie has downgraded its rating to Neutral, anticipating iron ore weakness in FY26-27. While BHP remains preferred over Rio Tinto ((RIO)) due to superior asset quality, a narrower valuation gap, and a more aligned growth outlook, this broker sees greater value in sector alternatives with less iron ore exposure.

Morgan Stanley and Citi have Buy ratings, while Morgans and Ord Minnett stick with Accumulate, midway between Buy and Hold in their rating hierarchy.

After downgrading from Outperform, Macquarie joins UBS with a Hold (or equivalent) rating.

Following the fourth quarter operational update, the average target price of the six brokers has risen to $42.15 from $41.23, broadly equating to the closing $41.85 share price on July 23.

On current updated forecasts, shareholders should expect another firm cut to their dividend this year with consensus from these six brokers projecting a decline by -32.3% to US98.8c. BHP’s dividend peaked in FY22 and has been in decline year after year since.

Current forecasts are for further decline in FY26, though only by -2.6%.

BHP’s earnings per share are expected to improve by circa 28% on FY24’s bottom performance, but consensus has penciled in a tough year with no growth from FY25’s performance.

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