BHP is Undervalued with a P/E of 10.39x; the Jansen Potash Project and 5.65% Dividend Make It a Compelling Contrarian Play

BHP Group (ASX: BHP) is facing a tough road ahead in 2025, and we think it’s best to steer clear of the stock for now. While it’s long been a dominant force in global commodities, several key challenges—including weaker commodity prices, strategic uncertainties, regulatory risks, and softer financial performance—make it a less attractive investment at this point. Commodity Price Volatility: A Big Problem for BHP Let’s start with the biggest issue—BHP relies heavily on iron ore and copper, which make up over 80% of its EBITDA. The problem? Iron ore prices have taken a big hit, tumbling from a peak of US$233 per tonne in 2021 to around US$139 per tonne by late 2024. We expect prices to hover around US$100 per tonne in 2025, which could continue to put pressure on BHP’s revenue and profitability. Copper prices aren’t doing much better. While long-term demand looks strong thanks to the green energy boom, short-term pressures—like a slowdown in China and rising global supply—are creating headwinds. Since both of these commodities are the backbone of BHP’s earnings, any prolonged price weakness will have a direct impact on the company’s financial health. BHP’s Transition Plan Comes with Big Risks BHP is trying to shift towards “future-facing” commodities like potash and nickel, but we see major risks with this strategy. The company is pouring CAD$14 billion into the Jansen potash project in Canada, but it’s not expected to generate meaningful cash flow until at least 2030. That’s a long wait for investors, especially when potash prices are still hovering between US$300 and US$400 per tonne. Then there’s nickel. BHP’s Western Australia nickel operations have already been placed into care and maintenance due to low prices and high costs. Nickel prices have fallen nearly 40% in the past year because of oversupply and weaker EV demand. Given these struggles, we’re sceptical that BHP can count on these “future-facing” commodities to offset weaker iron ore and copper earnings anytime soon. Regulatory and Environmental Headaches Aren’t Going Away BHP is also dealing with growing regulatory and environmental pressures. It’s still the world’s largest exporter of coking coal—an essential ingredient in steelmaking—and iron ore production indirectly contributes to significant global carbon emissions. Even though the company has set net-zero targets for 2050, it remains under pressure from regulators, activists, and investors demanding more action on sustainability. On top of that, tax and royalty risks could hit earnings. Australia is considering potential increases in mining royalties, while in Chile—home to BHP’s massive Escondida mine—the government is pushing for higher mining taxes. Any policy changes in these key regions could further eat into BHP’s profits. Weak Financial Performance Signals Trouble BHP’s financials aren’t painting a pretty picture. In FY24, earnings per share (EPS) dropped 39%, largely due to lower commodity prices and rising costs. Net profit after tax (NPAT) fell from $30.9 billion in FY23 to $19.1 billion in FY24, a steep decline that raises concerns about the company’s ability to maintain its financial strength. Free cash flow (FCF) also took a massive hit, plunging from $17.3 billion in FY23 to just $6.9 billion in FY24. That’s a big red flag for dividend and buyback sustainability, something investors should keep a close eye on. Meanwhile, BHP’s stock has underperformed the broader market, sliding more than 21% in 2024 while the S&P/ASX 200 Index gained about 8%. This signals that the market is growing more sceptical about BHP’s ability to manage these challenges effectively. BHP’s Competitive Positioning Isn’t as Strong as It Seems Despite being a low-cost producer, BHP’s approach of maintaining high production levels in a weak pricing environment comes with risks. The company has continued to produce at near-peak capacity, hoping to offset price declines with volume growth. However, this strategy could keep prices depressed for longer, ultimately hurting margins. Another issue? BHP’s decision to exit oil and gas has removed a historically strong revenue stream. While this move aligns with long-term sustainability goals, it has left BHP more vulnerable to swings in iron ore and copper markets. With newer investments like potash and nickel still years away from generating meaningful returns, we see a lopsided risk profile that could make earnings more volatile in the coming years. Bottom Line BHP has been a powerhouse in the global mining sector for decades, but right now, we think the risks outweigh the rewards. With iron ore and copper prices under pressure, potash and nickel investments years away from profitability, regulatory and environmental hurdles piling up, and financial performance weakening, the outlook isn’t great. Add in the fact that free cash flow has taken a serious hit, and it’s hard to justify holding BHP at this point. For members looking for exposure to mining and commodities, there may be better opportunities elsewhere—especially with companies that have more immediate growth drivers and stronger financial footing. Until BHP can prove that its transition plan is working and that commodity markets have stabilized, we think it’s best to stay on the sidelines.