BHP Group (ASX:BHP) faces a reassessment from analysts as commodity prices fluctuate and future dividend prospects come under scrutiny. Citi downgraded BHP to Neutral from Buy, setting a price target of A$43, following the release of the company’s FY25 results.
Shares in BHP are currently trading at A$41.75, down 0.88% in the day. The stock has seen a positive trend recently, rising approximately 3.62% over the last month. However, the downgrade introduces a note of caution.
Citi’s analyst described BHP’s FY25 results as “very solid,” but expressed reservations about the company’s ability to replicate the dividend surprise in FY26. The firm noted that while inflationary pressures have largely normalized across BHP’s cost base, some areas continue to experience elevated costs, remaining materially higher than pre-pandemic benchmarks.
BHP reported an underlying attributable profit of $10.16 billion for the year ending June 30, 2025, a 26% decline from the previous year. This decrease was primarily driven by a 19% drop in average iron ore prices, influenced by increased global supply and reduced steel production in China. Stronger copper prices partially offset this decline. The company declared a final dividend of $0.60 per share, bringing the annual payout to $1.10, the lowest since 2017.
Despite the profit decline, BHP achieved record production levels in key commodities during FY25. Copper production exceeded 2 million tonnes for the first time, up 28% over the past three years. Western Australia Iron Ore (WAIO) also delivered a new production record of 290 million tonnes. BHP maintained its position as the world’s lowest-cost major iron ore producer at WAIO, achieving a 4% reduction in unit costs at major assets despite inflationary pressures.
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The market capitalization for BHP is A$183.76 billion, with 5.07 billion shares outstanding. The company’s price-to-earnings (normalized) ratio is 9.95, and its price-to-sales ratio is 2.26. The dividend yield stands at 5.25%.
Analysts have raised concerns about BHP’s capacity to sustain its dividend payouts. UBS suggested that BHP’s net debt position and guidance “make it hard for BHP to pay above the 50% minimum payout.”
The company anticipates net debt to rise toward the upper end of its US$5 billion to US$15 billion range, marking its highest level since FY21. This increase is partly due to the Vicuña transaction, a joint venture with Lundin Mining to develop copper projects in Argentina.
Macquarie also downgraded BHP from Outperform to Neutral, citing a bearish outlook on iron ore price trends and anticipated market weakness in FY26/27. Despite BHP’s strong operational performance, Macquarie set a 12-month price target of $41.00, representing minimal upside from recent trading levels.
BHP is facing challenges in its Jansen potash project in Canada. Capital expenditure estimates have risen to US$7.0 billion to US$7.4 billion, a US$1.3 billion to US$1.7 billion increase from the original estimate. First production has been delayed to mid-2027 due to inflationary pressures, design development, scope changes, and lower-than-expected productivity during construction.
Looking ahead, BHP anticipates steady commodity demand amid global economic uncertainties and targets net debt between $10 billion and $20 billion. Capital and exploration spending is set to rise to $11 billion over the next two years before averaging $10 billion annually from 2028 to 2030. The company remains open to acquisitions in sectors like copper and potash if assets are of high quality and reasonably valued.
The Jansen project, despite its challenges, represents a significant opportunity for BHP to capitalize on the growing potash market. Furthermore, BHP’s proven track record of cost management and operational efficiency suggests that it can navigate inflationary pressures and maintain profitability even in a volatile commodity price environment.
The market may be too focused on short-term iron ore price fluctuations and underappreciating BHP’s strategic positioning for long-term growth.
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