---
endpoint: analytics
pattern: Materials
status: done
latency_ms: 206061
conversation_id: e8116eea-abb2-4b9d-aef1-1aa0246ca132
citations: 14
created: 2026-05-31 20:45:14Z
---

# How does BHP’s valuation compare to peers, and what justifies its premium/discount?

# BHP Valuation vs Peers — and What Justifies the Premium/Discount

**Sources used**: CLSA internal research (RMS workspace). The most recent CLSA cuts are from April–May 2025; corpus recency limits "latest" reads to that vintage.

---

## 1. Headline Valuation Snapshot (CLSA estimates)

| Metric (FY25E) | **BHP** (Jun YE) | **RIO** (Dec YE) | **FMG** (Jun YE) | **CIA** (Mar YE) |
|---|---|---|---|---|
| Rating | O-PF | O-PF | HLD | HLD |
| PE (x) | **11.6** [3] | **11.8** [5] | **11.6** [7] | **8.3** (FY26E) [9] |
| Dividend yield (%) | **4.4** [3] | **4.2** [5] | **4.8** [7] | **6.0** [9] |
| FCF yield (%) | **5.0** [3] | **5.7** [5] | — | — |
| P/B (x) | **2.6** [3] | **2.1** [5] | — | — |
| ROE (%) | **23.8** [3] | **18.5** [5] | **15.8** [7] | **14.0** (FY26E) [9] |
| Net debt/equity (%) | **21.6** [3] | **7.2** [5] | **13.1** [7] | **33.2** (FY26E) [9] |
| Applied EV/EBITDA multiple in valuation | **5.5x** [2] | **5.6x** [4] | **3.9x** [6] | **3.5x** [8] |

> Note: A prior CLSA cut (17-Feb-25, on 1HFY25 results) had BHP at **PE 11.7x / Div yield 4.3% / FCF yield 5.5% / ROE 26.0%** at a price near A$40 with US$131.7bn market cap [14] — directionally consistent with the April cut, indicating that the multiples have been broadly stable through the 1H/3Q reporting cycle.

---

## 2. The Multiple Spread — BHP Carries a Premium to Pure Iron-Ore Peers

CLSA's applied EV/EBITDA peer ladder makes the relative pricing explicit:

- **BHP** is valued on a **5.5x EV/EBITDA**, described as "close to BHP's historical trading average multiple" [2].
- **RIO** is valued on a slightly higher **5.6x** — based on "historical and peer averages" [4].
- **FMG** is valued on **3.9x**, described as "roughly -1 standard deviation from FMG's historical average, to reflect near term risks posed by commodity price volatility, given FMG's pure exposure to iron ore" [6].
- **CIA** (Champion Iron) is valued on **3.5x mark-to-market**, "to capture near-term risks posed by continued commodity price volatility, given CIA is a marginal, pure-play iron ore exposure" [8]. CIA currently trades below its 5-year average of ~4x [10].

→ The c.**1.5–2.0x EV/EBITDA premium** that BHP commands over FMG and CIA is therefore *not* a stretched valuation — it is the structural premium for **diversification away from a single commodity and away from marginal-cost positioning**. RIO trades essentially in line with BHP because it shares the same diversified profile.

---

## 3. What Justifies BHP's Premium

**(a) Portfolio quality / commodity mix.** BHP's NAV is a multi-commodity stack — iron ore A$39.09/sh, copper/base metals A$7.60/sh, met coal A$1.82/sh, potash A$2.69/sh — with iron ore accounting for ~77% of asset value but copper/base metals contributing the next-largest pillar [1]. By contrast, FMG and CIA are pure iron-ore. This is why CLSA expressly states it "continues to prefer RIO/BHP, both OPF rated, over FMG" given "continued commodity market volatility and leverage to any potential stimulus which would likely favour industrial metals" [12].

**(b) Returns profile.** BHP's CL FY25 ROE of **23.8%** is materially above RIO (**18.5%**), FMG (**15.8%**) and CIA (**14.0%**) [3][5][7][9]. The market is willing to pay a higher PE and P/B for the higher return on capital.

**(c) Balance sheet strength relative to commodity beta.** Net debt/equity of 21.6% [3] sits comfortably below CIA (33.2% [9]) and is manageable given BHP's superior cashflow generation. The 50/50 blended SOTP-DCF/EBITDA-multiple methodology uses a **9.9% WACC** for BHP vs **10.1% WACC** for RIO — i.e. the analyst already imputes a lower cost of capital to BHP, which mechanically supports the multiple [4][13 implicit comparison].

**(d) Macro positioning.** CLSA explicitly recommends "Buy gold producers, Rio Tinto & BHP" and flags "downside risk to commodity price expectations factored into 2025/26 VA consensus earnings forecasts, with little valuation discount" — meaning the bar is low and BHP/RIO are positioned as the diversified miners that can absorb commodity slippage better than pure-play peers [11].

---

## 4. Where BHP Trades at a *Discount* — and Why

Against the pure iron-ore peers BHP is at a premium, but the picture flips on certain metrics:

- **Dividend yield**: BHP 4.4% vs FMG 4.8% and CIA 6.0% [3][7][9]. Pure-plays return more cash because they have less reinvestment optionality (no copper growth pipeline like Escondida, no Jansen potash, no Resolution).
- **ROE compression vs history**: BHP's ROE is forecast to drop from **31.3% (FY24A) → 23.8% (FY25CL) → 19.6% (FY27CL)** [3] — a c.1,200bp derate over three years, primarily reflecting iron-ore price normalisation, FY26 capex on Jansen, and the higher base.
- **PE on rising forward-year basis**: BHP's PE expands from 9.2x (FY24A) to 12.0x (FY27CL) [3] because EPS is forecast to fall (EPS growth -20.4% in FY25CL, -7.4% in FY27CL). RIO shows a similar pattern (PE rising from 11.8x to 10.2x by FY27 only because EPS recovers off a lower base) [5]. **This is the key reason BHP looks "expensive on forward years" relative to history** — it's not a re-rating, it's earnings compression.

So the apparent forward-year **multiple discount vs historical** (5.5x being only the historical average, not a premium) is justified by:
- Iron ore price normalisation cycle expected through FY25–27
- Jansen capex absorbing FCF (FCF yield drops from 9.1% in FY24A to 4.0–4.8% in FY26–27CL [3])
- Net debt rising from 30.2% to ~27% as buybacks have been deprioritised vs growth capex

---

## 5. CLSA Target Price & Methodology

CLSA uses a 50/50 weighted SOTP-DCF and EV/EBITDA-multiple framework on BHP:
- **SOTP DCF** → A$44.21/sh (LOM DCF, 9.9% WACC) [1]
- **EBITDA multiple** → A$35.99/sh (5.5x × US$23.9bn FY25 EBITDA on BHP share) [1]
- **Weighted Target Price**: **A$40.00/sh** [1]

For comparison:
- **RIO** TP = A$125/sh (50/50 blend; DCF A$135 + EBITDA A$114) [13][5]
- **FMG** TP = A$15.50/sh (DCF A$17.32 + EBITDA A$13.66) [7 implicit]
- **CIA** TP = A$4.30/sh (100% EBITDA-multiple) [8]

---

## 6. Bottom Line

BHP's premium to FMG/CIA (roughly **1.5–2.0x EV/EBITDA points**) is justified by: (i) **portfolio diversification** into copper, potash and met coal, (ii) a **structurally higher ROE** (~24% vs ~14–16% for pure-plays), (iii) a **lower cost of capital** in analyst models (9.9% WACC vs ~10.1% for RIO and higher implied for marginal producers), and (iv) **growth optionality** in copper and potash that pure-plays cannot replicate.

Where BHP trades at a relative **discount on cash yield** (lower dividend yield than FMG/CIA), the trade-off is that BHP is reinvesting in Jansen and copper expansions — i.e. shareholders are paying for forward growth, not just current carry. RIO is the closest peer on quality and trades essentially in line on multiples; CLSA effectively pairs them as a "diversified miner basket" preferred over FMG/CIA in the current cycle [12][11].

---

**Sources**
[1] BHP — O-PF (A solid 3Q result, led by Cu.) — CLSA (17 Apr 2025) — SOTP valuation table
[2] BHP — O-PF (A solid 3Q result, led by Cu.) — CLSA (17 Apr 2025) — Valuation methodology
[3] BHP — O-PF (A strong 3QFY25 result) — CLSA (17 Apr 2025) — Financials table
[4] Rio Tinto — O-PF (Transitional margin weakness) — CLSA (16 Apr 2025) — Valuation methodology
[5] Rio Tinto — O-PF (Transitional margin weakness) — CLSA (16 Apr 2025) — Financials table
[6] Fortescue — HLD (Clarity at Iron Bridge) — CLSA (22 May 2025) — Valuation methodology
[7] Fortescue — HLD (Clarity at Iron Bridge) — CLSA (22 May 2025) — Financials table
[8] Champion — HLD (Ramping growth (and leverage)) — CLSA (29 May 2025) — Valuation methodology
[9] Champion — HLD (Ramping growth (and leverage)) — CLSA (29 May 2025) — Financials table
[10] Champion — HLD (Ramping growth (and leverage)) — CLSA (29 May 2025) — Re-rate scenario commentary
[11] Global metals & mining (Buy gold producers, Rio Tinto & BHP) — CLSA (7 May 2025) — Sector positioning
[12] Fortescue — HLD (Clarity at Iron Bridge) — CLSA (22 May 2025) — RIO/BHP preferred over FMG
[13] Rio Tinto — O-PF (Transitional margin weakness) — CLSA (16 Apr 2025) — EV/EBITDA valuation table
[14] BHP — HLD (In line 1HFY25 financials) — CLSA (17 Feb 2025) — Market cap & TP A$40

## Citations

- [1] **607956168LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607956168LinqAlpha.PDF>
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- [3] **607956139LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607956139LinqAlpha.PDF>
- [4] **607956082LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607956082LinqAlpha.PDF>
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- [6] **607960216LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960216LinqAlpha.PDF>
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- [8] **607960816LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960816LinqAlpha.PDF>
- [9] **607960816LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960816LinqAlpha.PDF>
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- [11] **607958391LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607958391LinqAlpha.PDF>
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- [13] **607956082LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607956082LinqAlpha.PDF>
- [14] **607950918LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/02/607950918LinqAlpha.PDF>

