BHP's Earnings Decline: A Cyclically Driven Opportunity for Long-Term Investors?

The recent earnings report from BHP Group (ASX: BHP) has sparked debate among investors. While the mining giant's underlying attributable profit for FY25 fell to $10.16 billion—a 26% drop from the prior year—this decline is not a sign of structural weakness but a reflection of cyclical headwinds in the iron ore market. For long-term investors, this represents a compelling opportunity to assess whether the market's overreaction to near-term challenges has created an undervalued entry point.

Iron Ore: A Cyclical Commodity in a Structural Transition

BHP's iron ore business, which accounts for roughly 60% of its revenue, has been hit hardest by a confluence of factors. The 19% decline in realized prices year-over-year was driven by oversupply from Australia, Brazil, and South Africa, coupled with weaker demand from China. Beijing's shift toward electric arc furnace steelmaking (which relies on scrap rather than iron ore) and its property sector slowdown have further compressed demand. However, these dynamics are not permanent.

The Chinese steel industry is undergoing a structural transition, but global demand for iron ore remains anchored to urbanization and infrastructure development. BHP's production guidance for FY26 (284–296 million metric tonnes) and its disciplined cost management—evidenced by a 24% three-year copper production growth—highlight its ability to navigate volatility. Notably, BHP's Pilbara operations achieved 77.48 million tonnes of iron ore production in Q2 2025, a 14.2% quarter-over-quarter increase, demonstrating operational resilience.

Valuation Metrics: A Discount Amid Peer Comparison

BHP's current valuation appears attractive when compared to industry peers and historical averages. With a trailing P/E of 11.99 and a forward P/E of 13.28, the stock trades at a discount to its long-term average of 14.5. Its EV/EBITDA of 5.94 ranks in the top quartile of the Metals & Mining sector, outperforming 75% of its competitors. The price-to-book ratio of 2.75 also suggests the market is undervaluing BHP's asset base, particularly its high-grade iron ore reserves and low-cost copper operations.

Despite these metrics, analysts remain bearish, with a consensus “Sell” rating and a $48.50 price target (a 9.23% discount to the current $53.88 share price). This pessimism is largely driven by short-term macroeconomic risks, including U.S. tariff threats and China's economic slowdown. However, BHP's balance sheet—characterized by a 1.70 current ratio, 0.44 debt-to-equity ratio, and $10.36 billion in free cash flow—provides a buffer against volatility.

Strategic Entry Point: Balancing Risks and Rewards

The key question for investors is whether BHP's earnings decline is a temporary correction or a precursor to a prolonged downturn. The data suggests the former. BHP's iron ore prices have rebounded to near-FY25 averages, and copper prices, which rose sharply in Q4 2025, position the company to benefit from the energy transition. Additionally, BHP's $11 billion investment in growth projects and exploration over the next two years underscores its commitment to long-term value creation.

While the 109.33% payout ratio and reduced dividend (from $0.74 to $0.60 per share) raise sustainability concerns, the company's 27.69% ROE and 18.84% ROIC indicate efficient capital deployment. For long-term investors, the risk-reward profile is skewed in favor of entry, particularly if iron ore prices stabilize as supply-demand rebalancing takes hold.

Conclusion: A Cyclical Dip, Not a Structural Decline

BHP's earnings decline is a symptom of a cyclical downturn in iron ore, not a reflection of operational or strategic failure. The company's disciplined cost control, production resilience, and strong balance sheet position it to outperform peers as commodity cycles normalize. While near-term risks persist, the current valuation offers a strategic entry point for investors with a multi-year horizon.

For those willing to look beyond the noise of macroeconomic headlines, BHP's undervalued metrics and enduring demand for its commodities make it a compelling case study in buying low during a cyclical trough. As the CEO, Mike Henry, emphasized, BHP's focus on operational excellence and long-term value creation remains intact—a reminder that the best opportunities often arise when markets overreact.