Global Decarbonization And Asia Demand Will Underpin Durable Metals Performance

Key Takeaways

• Strong demand for critical minerals and steelmaking materials supports stable growth, benefiting from decarbonization trends and expanding infrastructure in Asia and India.
  
• Focus on long-life, low-cost assets and disciplined capital management underpins resilient earnings, premium pricing, and sustained shareholder returns.
  
• Heavy concentration in iron ore, project execution risks, regulatory hurdles, inflation, and ESG pressures threaten BHP's revenue stability, margin performance, and long-term profitability.

Catalysts

Operates as a resources company in Australia, Europe, China, Japan, India, South Korea, rest of Asia, North America, South America, and internationally.

• Strong pipeline of copper and potash projects positions BHP to benefit from a global surge in decarbonization efforts and electrification initiatives, with rising demand for critical minerals expected to drive higher future revenues.
  
• Increasing infrastructure development and ongoing urbanization in Asia and India are set to underpin robust demand for steelmaking materials, supporting stable or growing iron ore volumes and revenue.
  
• Optimization and re-sequencing of major projects, combined with ongoing cost leadership-especially in Western Australian iron ore and copper operations-are likely to expand net margins and underpin resilient earnings growth.
  
• The company's focus on long-life, low-cost assets in world-class jurisdictions positions BHP as a reliable supplier, attracting long-term supply agreements and potentially supporting premium pricing and more stable long-term cash flow.
  
• Disciplined capital management, including a reduction in medium-term capex guidance, continued high free cash flow generation, and a strong balance sheet, enhances BHP's capacity for sustained shareholder returns through dividends and buybacks, positively impacting return on equity.

BHP Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BHP Group's revenue will decrease by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.6% today to 20.2% in 3 years time.
• Analysts expect earnings to reach $10.0 billion (and earnings per share of $1.89) by about September 2028, up from $9.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $12.1 billion in earnings, and the most bearish expecting $8.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.6x on those 2028 earnings, up from 15.5x today. This future PE is greater than the current PE for the US Metals and Mining industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

BHP Group Future Earnings Per Share Growth

Risks

• Overexposure to iron ore and concentration risk in Western Australian operations exposes BHP to volatility in Chinese steel production and global iron ore pricing, so any significant or sustained slowdown in Chinese demand or further increases in iron ore market competition could materially impact group revenue and earnings stability.
  
• Delays and cost overruns in major growth projects, as highlighted by the recent challenges at the Jansen potash project (higher inflation, lower productivity), suggest ongoing execution risks; this could increase capex requirements and depress net margins or delay revenue realization from new production.
  
• Growing regulatory complexity and water/resource constraints in key jurisdictions-such as the need for efficient permitting and the success of the Northern Water Project in South Australia-may pose obstacles to operational expansion, potentially restricting volume growth and increasing compliance costs, which would pressure margins and future earnings.
  
• Persistently high inflationary pressures and rising labor costs, as noted in BHP's most recent results, risk eroding unit cost improvements and offsetting operational gains, thus compressing net margins even when volumes grow.
  
• The group's exposure to rising global ESG scrutiny and evolving decarbonization requirements, including delays in developing decarbonization technology (such as diesel displacement), could result in higher compliance costs, increased capital allocation to environmental projects, or potential reputational risks, all of which may increase cost of capital and reduce net profitability over the long term.

Valuation

• The analysts have a consensus price target of A$42.871 for BHP Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$46.55, and the most bearish reporting a price target of just A$35.82.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $49.6 billion, earnings will come to $10.0 billion, and it would be trading on a PE ratio of 17.6x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of A$42.29, the analyst price target of A$42.87 is 1.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.