BHP's Unsustainable Dividend and Capex Strategy Undermine Long-Term Value

In the ever-evolving mining sector, BHP Group (BHP) has long been a bellwether for financial prudence and operational excellence. However, recent analyst actions and industry trends suggest a growing disconnect between BHP's capital allocation strategy and its long-term value proposition. Berenberg's recent downgrade of BHP from “Hold” to “Sell” in 2025—coupled with a price target of $44, implying a 20% downside—signals a critical juncture for the company. This move, echoed by Citigroup, Macquarie, and BMO Capital, reflects deepening concerns over BHP's escalating capex, unsustainable dividend, and deteriorating free cash flow dynamics.

The Capex Overhang and Free Cash Flow Erosion

BHP's capital expenditures have surged in recent years, driven by ambitious projects like the Jansen potash venture and a broader push into energy transition metals. While these investments align with long-term industry trends, they come at a cost: BHP's free cash flow has contracted sharply. For fiscal 2025, the company reported $5.3 billion in free cash flow, a 55% drop from $11.9 billion in 2024. This decline is exacerbated by falling iron ore and coal prices, which have eroded margins despite record copper production.

Berenberg's analysis highlights a structural issue: BHP's capex is now outpacing its ability to generate sustainable cash flow. The firm projects that BHP's net debt will balloon to over $20 billion by 2030, far exceeding its current target range of $5–15 billion. This trajectory threatens to force a revision of BHP's “guardrails”—a move that could spook investors accustomed to the company's historically conservative financial management.

The Dividend Dilemma

BHP's dividend, once a cornerstone of its appeal to income-focused investors, is now under scrutiny. The company's 60% payout ratio (final dividend of $0.60 per share in 2025) appears increasingly “expensive” in a context of shrinking free cash flow. Analysts warn that maintaining this payout while funding high-risk capex projects could strain liquidity. For context, BHP's net debt-to-EBITDA ratio has already risen to 0.8x, up from 0.5x in 2023, signaling a shift toward financial leverage that diverges from its peers.

Industry-Wide Shifts: Free Cash Flow as the New Benchmark

The broader mining sector is witnessing a paradigm shift. Gold miners, for instance, are generating record free cash flow margins of 30% in 2025, driven by gold prices near $3,300 per ounce and stable production costs. Companies like Agnico Eagle have leveraged this windfall to boost dividends and fund exploration, while maintaining disciplined capex. In contrast, BHP's approach appears misaligned with this trend.

Junior miners are also redefining capital efficiency. Firms like Marimaca Copper and Revival Gold are adopting phased development models, prioritizing near-term cash flow over speculative scale. These strategies highlight a sector-wide move toward projects with lower capex and higher returns on invested capital—a stark contrast to BHP's current trajectory.

The Investment Case: Reallocating to Free Cash Flow Disciplinarians

For investors, the message is clear: BHP's capital allocation risks eroding shareholder value. While the company's “GREAT” financial health score (3.41) and strong current ratio (2.47) suggest short-term liquidity is intact, the long-term outlook is clouded by debt overhang and capex overreach.

The mining sector offers better alternatives. Gold miners with robust free cash flow margins and disciplined capex—such as Agnico Eagle or Newmont—present compelling value. Similarly, junior miners like Revival Gold, which prioritize phased development and strategic partnerships, offer exposure to growth without the financial risk of overleveraged giants.

Conclusion: A Call for Strategic Realignment

BHP's current strategy, while ambitious, is increasingly at odds with the realities of a capital-constrained market. Analysts' downgrades and earnings revisions underscore the urgency for a recalibration of capex and dividend policies. For investors, the path forward lies in favoring miners with proven free cash flow discipline and alignment with energy transition trends. BHP may yet adapt, but until it demonstrates a commitment to sustainable capital allocation, its long-term value remains at risk.