Morningstar DBRS Confirms BHP Group Limited Credit Rating at "A" With a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of BHP Group Limited (BHP or the Company) at "A" with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation is supported by (1) the Company's portfolio of high-quality mining assets, including the recent acquisition of OZ Minerals Limited (OZ Minerals) and its low-cost copper assets that are predominately located in the mining-friendly jurisdiction of Australia, and (2) the Company's strong key credit metrics as a result of elevated commodity prices that have persisted over the past few years. The Stable trend reflects BHP's downward trajectory of adjusted debt, which has gradually declined by 17% over the past four years.

CREDIT RATING DRIVERS
Morningstar DBRS views BHP's liquidity profile as positive, with $12.5 billion of cash and $5.5 billion available on the Company's credit facility as at June 30, 2024. Nevertheless, a positive rating action in the near term is unlikely in the absence of a significantly accretive acquisition that materially improves BHP's business risk profile. Morningstar DBRS estimates that prices for BHP's mix of mined commodities would have to decline by approximately 20% to 30% below the Bloomberg consensus commodity price forecasts on a sustained basis before a negative rating action could be considered.

EARNINGS OUTLOOK
BHP faced operating headwinds related to the Coronavirus Disease (COVID-19) pandemic, supply chain disruptions, and significant inflationary pressures in labor and consumable costs throughout F2021 to F2024. However, BHP's operating margins have remained resilient and have stayed at a similar level in the past two years. Looking ahead, Morningstar DBRS notes that operating margins are expected to be maintained based on Bloomberg consensus mined commodity price forecasts (as of October 1, 2024), albeit with risks to the downside because of the current global economic uncertainty. Morningstar DBRS expects EBITDA to be in the $20.0 billion to $25.0 billion range in F2025, or at a similar level as reported in F2024, based on the midpoint of BHP's F2025 guidance and the Bloomberg consensus commodity price forecasts (as of October 1, 2024).

FINANCIAL OUTLOOK
Based on BHP's F2025 guidance as well as Bloomberg consensus commodity price forecasts (as of October 1, 2024), Morningstar DBRS expects the Company to generate between $12.5 billion and $17.5 billion in adjusted cash from operations. However, Morningstar DBRS expects no free cash flow surplus in F2025 after capital expenditures of $10.0 billion and forecasted dividends of approximately $6.0 billion.

CREDIT RATING RATIONALE
The Company's key credit metrics remained at a similar level in F2024 compared with F2023 because weaker commodity prices were partially offset by lower debt levels as the Company repaid its $5.0 billion acquisition facility associated with the acquisition of OZ Minerals. The cash flow-to-debt metric remained in the AA category, the debt-to-EBITDA and debt-to-capital metrics remained in "A" category, and EBITDA-to-interest metric remains at the BBB category. In F2025, BHP's metrics are also expected to remain in the same categories.

The Company continues to make progress at its major projects, including (1) the Jansen Stage 1 potash project tracking on plan for initial production in 2026, (2) the expansion of its Western Australian iron ore operations to 330 million tonnes per year with a near-term focus on achieving a sustainable run rate of 305 mtpa and then gradually increasing to 330 mpta, and (3) the implementation of autonomous trucks across its mining operations globally, which include the deployment of autonomous haulage trucks at Escondida, which began in F2024 and will continue over the next few years.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors
Since the last credit rating action, the relevance or significance of the following Social factor changed: Morningstar DBRS previously considered community relations a relevant Social factor for BHP. However, after years of negotiations, BHP and partner Vale S.A. (Vale; rated BBB (low) with a Stable trend by Morningstar DBRS) are close to a final settlement with the local communities affected by the Samarco Dam failure in Brazil in 2015. As a result, Morningstar DBRS no longer deems this factor relevant.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of BHP, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of BHP, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of BHP, the BRA carries greater weight than the FRA.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Mining and Forest Products Industries (June 27, 2024)
https://dbrs.morningstar.com/research/435122.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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