Brokers respond to BHP March Qtr result: Strong copper and iron ore not enough to outweigh terrible coal

BHP Group (ASX: BHP) released its third quarter production report yesterday. It was up only +0.3% on the day, against a broader market rise of +0.5%, and that’s with positive leads from copper, nickel, and iron ore prices on Wednesday.

Copper and nickel prices have surged even further overnight, and iron ore prices are hovering near 6-week highs. At the time of writing, BHP is down, so you could say it has been a lukewarm response to the quarterly report from investors so far.

The major brokers have been busy tweaking their numbers for BHP in light of the new data, and that means a fat pile of BHP research reports on my desk this morning! I’ve read them all, and here’s a summary of the best bits, along with the latest updates to ratings and price targets.

Citi

Retained at BUY; Price Target: $48.00

• March quarter production was broadly as expected

• Care and maintenance, then closure, most likely for upcoming WA nickel business update

• FY24/25 EBITDA revised down 2% due to adjustments in production volumes and lowered forecast for June quarter iron ore price from US$120 to US$110

• BHP is trading on a FY26 price to earnings ratio (PE) of 11.3 and enterprise value to earnings before interest, tax, depreciation, and amortisation (EV/EBITDA) of 5.5, this compared to long-term average of 14 and 6.4 respectively

• “So valuation is still supportive and we are heading into the seasonally strong period for China steel production”

CLSA

Retained at UNDERPERFORM; Price Target: $45.00 from $43.50

• Price target upgrade is due to recent upturn in commodity prices

• Negative weather impacts did not materially impact broadly achieving consensus estimates

• Notes some concerns regarding Nickel West outcomes, rising costs

• Still prefers Rio Tinto (ASX: RIO) due to that company’s greater consistency in execution

Goldman Sachs

Retained at BUY; Price Target: $49.00 from $49.20

• March quarter production was “slightly stronger” that expected

• Iron ore and copper production beat broker’s forecasts by 2%, but metallurgical coal production was 17% below expected

• No change to FY24 and FY25 forecast earnings per share (EPS), but FY26 trimmed by 2%

• Feels BHP valuation is “attractive” but remains “at a premium” to RIO

• “We remain bullish on copper” says broker, BHP’s copper contribution to EBITDA is expected to increase from current 30% to 43% by FY26

JP Morgan

Retained at OVERWEIGHT; Price Target: $52.00

• March quarter iron ore and copper production was inline with expectations, but metallurgical coal and nickel were below expectations

• Notes current support from attractive valuation and appreciates BHP’s exposure to improving base metals markets

• Executing on planned operational improvements, as well as upcoming strategic reviews will be important in determining future performance

Macquarie

Retained at NEUTRAL; Price Target: $42.00

• March quarter iron ore and copper production was inline with expectations, as was metallurgical coal (but broker had very low expectations compared to consensus)

• Copper performance was “key” to result

• Broker sees “complexity” in BHP hitting its iron ore production target of 305 mtpa, even after accounting for fire and weather impacts

• FY24 EPS forecast is cut by 1%, but by 2.3% for FY26 and beyond

• “BHP's asset quality is unrivalled with WAIO, Escondida, Antamina and Jansen. Organic growth optionality is limited; new options are needed”, says the broker

Morgan Stanley

Retained at EQUAL-WEIGHT; Price Target: $47.00

• Broker reported no change to their investment thesis as a result of the March quarter update, but noted a “modest shortfall" in the company’s financial results versus consensus

• Broker expects a “modest” revision lower to next 12-month consensus EPS

Morgans

Retained at ADD; Price Target: $48.30 from $47.60

• Operational performance was strong in the March quarter after taking into account weather impacts at coal operations

• Iron ore and copper divisions are expected to maintain their strong performance

• Broker notes positive progress at Jansen Stage 1

• Broker notes BHP’s solid earnings quality and growth prospects

RBC Capital Markets

Retained at SECTOR PERFORM; Price Target: $45.00

• March quarter performance (ex-metallurgical coal) was better than expected

• Metallurgical coal division triggers broker to downgrade its free cash flow (FCF) and EPS estimates

• WA Nickel strategy update could be a risk event, and is expected by the time BHP reports FY24 results in August

• Broker appreciates BHP’s strong FCF and its dividend yield

UBS

Retained at NEUTRAL; Price Target: $44.00 from $45.00

• Suggests March quarter performance was mixed, pointing out a strong copper result, but worse than expected results from metallurgical coal and nickel

• Metallurgical coal and nickel performances have triggered a cut to FY24 EPS forecast

• Broker indicates it still prefers RIO on the back of that company’s better FCF

• Appreciated copper potential, particularly at Escondida and Spence, but remains concerned about nagging underperformance of metallurgical coal

BHP broker consensus

Based upon the above individual ratings and price target, let’s calculate a BHP broker consensus.

I like to assign a value of 0 to any rating better equivalent to a HOLD/NEUTRAL, a +1 to any rating better, and a -1 to any ratings worse. If the average rating is +0.5 or greater, I call it a BUY, and if the average rating is -0.5 or worse, I call it a sell.

On this basis, BHP’s average score is +0.44 giving it a consensus rating of HOLD/NEUTRAL.

The price target is a little easier. The average price target for BHP among the brokers sampled is $46.59, marginally higher than the average price target of $46.55 prior to the March quarter update. If you prefer, BHP’s median price target is unchanged at $47.

Based upon BHP’s price at the time of writing of $44.55, this allows for 4.6% upside to the broker’s average price target, and 5.5% upside to their median price target.