BHP Downgraded by Jefferies to “Hold”

Analysts from Jefferies in a note dated Friday downgraded BHP (LON:BHPB) (ASX:BHP) from “buy” to “hold”. The revision stems from various factors, including the company’s capital expenditure (capex) plans, potential mergers and acquisitions (M&A) risks, and its recent share price performance.

Long-Term Outlook

Despite the downgrade, Jefferies maintains a positive long-term outlook for BHP, although they note increasing risks that could offset near-term gains.

Changes in Commodity Price Forecasts

Jefferies revised its commodity price forecasts and outlook for the mining sector, adapting to recent macroeconomic conditions such as China’s stimulus efforts and potential rate cuts in the US. This has caused significant changes in mining share prices, particularly for metals like copper and aluminum. However, the investment case for BHP has become more complex due to potential risks ahead, even with a supportive macro environment.

Possible M&A Activity

A key concern for Jefferies is BHP’s intention to pursue another acquisition, possibly of Anglo American (JO:AGLJ), once the six-month restriction period on bidding ends in November. This M&A risk, along with expected increases in capex, may pose challenges for shareholders.

Jefferies highlighted that BHP is entering a period of elevated spending, driven by ambitions in copper growth projects like Filo and Josemaria in Argentina, as well as the ongoing development of the Jansen potash project in Canada. These investments are crucial for long-term growth but could limit BHP’s capacity to deliver returns to shareholders beyond a 50% base payout ratio, unless commodity prices surpass expectations.

Concerns Over Metallurgical Coal Exposure

Another challenge for BHP is its exposure to metallurgical coal. Although Jefferies remains bullish on this commodity, BHP’s leverage is restricted by an escalating price-based royalty regime in Queensland, which diverts much of the upside to the government, limiting shareholder benefits from higher met coal prices.

Share Performance and Premium Valuation

BHP shares have performed strongly recently, which contributed to the decision to downgrade. Jefferies noted that the shares are now trading at a premium relative to peers based on calendar year 2026 estimates. At current valuations, Jefferies believes the risk/reward trade-off is balanced, with limited upside in the near to medium term, leading to the downgrade.

Broader Mining Sector Perspective

Despite the downgrade for BHP, Jefferies remains optimistic about the broader metals and mining sector. They have identified Glencore (LON:GLEN), Freeport-McMoRan (BCBA:FCXm), Alcoa, and Teck Resources (NYSE:TECK) as top picks due to favorable commodity exposure and strategic growth opportunities.