Investing.com -- Analysts from Jefferies in a note dated Friday downgraded BHP (LON:BHPB) (ASX:BHP) to "hold" from “buy.” The revision stems from a combination of factors related to the company's capex plans, potential M&A risks, and its share price performance.
Although Jefferies maintains a positive long-term outlook for BHP, they see increasing risks that could offset near-term gains.
Jefferies revised its commodity price forecasts and outlook for the mining sector, adjusting to recent macroeconomic conditions, such as China’s stimulus efforts and potential rate cuts in the US.
This backdrop has led to a step-change in mining share prices, particularly for metals like copper and aluminum. However, despite the supportive macro environment, the investment case for BHP has become more complex due to potential risks ahead.
One key concern is the possibility of BHP pursuing another acquisition, such as Anglo American (JO:AGLJ), after the six-month restriction period on bidding ends in November.
This M&A risk, combined with an expected increase in capex, poses potential headwinds for shareholders. Jefferies flagged that BHP is entering a period of elevated spending, driven by its ambitions in copper growth projects, like Filo and Josemaria in Argentina, and the ongoing development of the Jansen potash project in Canada.
These investments, while necessary for long-term growth, may limit BHP’s ability to deliver returns to shareholders beyond its 50% base payout ratio unless commodity prices exceed expectations.
Another challenge relates to BHP's exposure to metallurgical coal.
While Jefferies remains bullish on this commodity, BHP’s leverage is limited by the escalating price-based royalty regime in Queensland, which directs much of the upside to the government. This limits the potential for shareholders to benefit from higher met coal prices.
BHP shares have performed strongly recently, contributing to the decision to downgrade. Jefferies pointed out that the shares now trade at a premium relative to peers, based on calendar year 2026 estimates.
At current valuations, Jefferies believes the risk/reward tradeoff is balanced, with limited upside in the near to medium term, leading to the downgrade.
Despite this downgrade, Jefferies remains constructive on the broader metals and mining sector. They view Glencore (LON:GLEN), Freeport-McMoRan (BCBA:FCXm), Alcoa, and Teck Resources (NYSE:TECK) as top picks due to their exposure to favorable commodities and strategic growth opportunities.