Jefferies Downgrades BHP to “Hold” Due to Capex and M&A Risks

Analysts from Jefferies downgraded BHP from “buy” to “hold” in a note released on Friday. This decision is based on several factors related to the company’s capital expenditure plans, potential merger and acquisition risks, and its share price performance.

While Jefferies maintains a positive long-term outlook for BHP, they have identified increasing risks that could offset short-term gains. The analysts have also adjusted their commodity price forecasts and outlook for the mining sector to align with recent macroeconomic conditions, including China’s stimulus measures and possible interest rate cuts in the United States.

This environment has prompted significant shifts in mining share prices, especially for metals such as copper and aluminum. Nonetheless, despite favorable macro conditions, the investment landscape for BHP has become more complicated due to emerging risks.

A major concern is the likelihood that BHP may pursue another acquisition after the six-month bidding restriction ends in November. This potential M&A activity, coupled with an expected rise in capital expenditures, presents challenges for shareholders. Jefferies highlighted that BHP is entering a phase of increased spending, driven by its ambitions in copper growth projects in Argentina and the ongoing development of a potash project in Canada.

Such investments, while crucial for long-term growth, might restrict BHP’s ability to provide returns to shareholders beyond its standard base payout ratio unless commodity prices exceed current expectations.

Another challenge facing BHP is its exposure to metallurgical coal. Although Jefferies remains optimistic about this commodity, BHP’s potential benefits are limited by a rising price-based royalty regime in Queensland, which diverts much of the profit increase to the government, thereby limiting shareholder gains from higher metallurgical coal prices.

Recently, BHP shares have performed well, which factored into the downgrade decision. Jefferies noted that the shares currently trade at a premium compared to industry peers, based on projections for 2026.

At present valuations, Jefferies perceives the risk/reward balance as neutral, with limited upside anticipated in the near to medium term, thus leading to the downgrade.

Despite this downgrade, Jefferies remains positive on the broader metals and mining sector, identifying several companies as top picks due to their favorable commodity exposure and strategic growth potential.