BHP (ASX: BHP) provided a comprehensive update on its Chilean copper operations during a four-day investor and analyst site tour from November 18-21. The tour, while marked as non-market sensitive, offered valuable insights into the mining giant's growth strategy and perspectives on the copper market.
BHP's Chilean copper snapshot: BHP has operated in Chile for over 30 years, accounting for approximately 27% of the nation's total copper production. The company's Chilean assets, including Escondida, represent the world's largest copper resource, with approximately 26 billion tonnes of resource at 0.53% copper grade.
The mining industry is facing significant challenges that BHP is carefully navigating. More than half the mines operating in 2023 are over 20 years old. Copper grades have been in a consistent long-term decline, falling from approximately 1.00% in 1991 to 0.60% in 2024. Brownfield projects are experiencing increasing capital intensity, rising from US$14,000 per tonne in the 2010s to US$23,200 per tonne in the 2020s.
Greenfield projects present additional complexities, with even approved projects taking up to 17 years from discovery to first production. BHP is seeking to maintain its position in Chile with a program of high-quality projects that leverage existing infrastructure and deliver production growth. The company is targeting an internal rate of return between 15-19% at a capital intensity of US$19-26,000 a tonne.
Morgan Stanley says the company's copper story remains robust, underpinned by a deficit emerging in the market from 2027 onwards. The analysts retained an Overweight rating with a $46.85 target price. Some of their key findings from the presentation and site trip include:
Chile copper capex is significantly higher, offset by higher production. Assuming all growth projects go ahead, spend for all projects would average US$2.5 billion per annum over FY28-32 or 90% higher than Morgan Stanley estimates. The analysts view this as a negative for free cash flow generation, partially offset by 35-120ktpa more copper production.
Chilean investment environment has improved markedly, with the new royalty regime now in place and referendum on the constitution behind us.
Citi maintained a Buy rating with a $46.00 target price. The analysts highlight BHP's path to sustaining Chile copper output around the average 1.4 million tonnes per annum (100% basis) through FY31-40, after a temporary dip to 1.2 million tonnes in FY27-30.
Goldman Sachs offered the most bullish perspective, with the highest target price of $47.30. The analysts predict that BHP's copper-related EBITDA will grow from 30% of total earnings to 45% by 2030. They cautioned about potential net debt pushing through the US$15 billion ceiling towards the end of the decade, but believe the balance sheet remains strong. The key takeaways from their investment thesis include:
BHP is currently trading at approximately 6.0x Next Twelve Months (NTM) EBITDA, which is slightly below its 25-year average of 6.6x
The company trades at a slight premium to Rio Tinto
Free cash flow yield is currently 3%, just below Rio Tinto's 5%
BHP is forecast to generate US$11.1 billion in copper EBITDA in FY25, growing to US$12.0 billion by FY26
The analysts see BHP's major opportunity in growing copper production in Chile at Escondida and Spence, and capturing synergies in South Australian operations between Olympic Dam and the previous Oz Minerals assets.
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