Morgan Stanley: The expansion value of BHP South Australia copper mine is still underestimated, on-site inspection may become a catalyst for revaluation, “Overweight” rating maintained.

According to Zhitong Finance APP, Morgan Stanley has released a research report maintaining an "Overweight" rating for BHP Group (BHP.US) on the Australian stock market, with a target price of AUD 68. The analyst team expects that the upcoming site inspection of the South Australia Copper Belt (Copper SA) project may serve as a major catalyst. The report notes that the market has yet to fully price in the expansion scale of the South Australian copper mining sector, the cost reductions brought by block caving mining, and the significant support gold, silver, and uranium by-products offer to the project's overall economics.

Currently, the South Australian copper mining segment accounts for about 14% of BHP Group's Net Asset Value (NAV), equating to an NAV per share of AUD 10.05, while contributing 14% of the expected attributable EBITDA for FY2027. However, market consensus has yet to fully reflect the benefits of the project expansion, with Visible Alpha consensus estimating this segment's NAV per share at just AUD 7.25, about 39% lower than Morgan Stanley's baseline assumptions.

Large-scale Block Caving Mining + Smelter Refinery Expansion Drives Cost Downside Logic

The research report points out that the cost advantage of the South Australian copper mining sector derives from two core drivers: large-scale underground block caving mining and the implementation of the Smelter Refinery Expansion (SRE) project.

The Carrapateena mine has completed development drifts for 12 million tons per year block caving, with plans to ramp up and release capacity from FY2030. Olympic Dam is evaluating a 10 million ton per year block caving plan, with a potential Final Investment Decision (FID) slated for the calendar year 2029. Large-scale underground block caving mining can significantly improve mining efficiency and dilute fixed costs. Referring to global mine transformation experiences, after Cadia and Grasberg switched from conventional mining to large-scale block caving, unit mining costs dropped significantly. Data from the Northparkes project also shows that block caving mining can reduce per-ton mining costs by about 20% compared to sub-level caving. Morgan Stanley estimates that after FY2033, the unit operating costs of the South Australian copper mines—before by-product credits—will be 9% lower than market consensus.

The Smelter Refinery Expansion (SRE) is another key lever. Adopting a two-stage flash smelting process, the SRE upgrades existing smelting facilities in phases 1a, 1b, and subsequent stages, and once completed, the district's refined copper cathode capacity will reach 650,000 tons per year. Post-expansion, BHP can process copper concentrates produced by Carrapateena and Prominent Hill locally, reducing external concentrate sales, processing charges, and logistics losses, while also recovering sulfuric acid by-products. Referencing the integrated smelter projects at Kansanshi and Kamoa‑Kakula, self-owned smelting systems can significantly reduce overall operating costs and avoid uranium concentrate deduction penalties, thereby boosting realized metal returns.

In terms of production plans, under Morgan Stanley's base case, South Australian copper mines could achieve average annual copper output of 500,000 tons from FY2033–2040. However, market consensus expects peak output of just 390,000 tons per year, dropping to 335,000 tons by FY2040. The market has not fully priced in the production increases from Carrapateena block caving, Olympic Dam expansion, Oak Dam (Ankata) and phase II of Olympic Dam Deeps (OD Deeps). The Oak Dam and OD Deeps phase II projects are expected to reach FID by calendar year 2032 and commence production by 2038, supporting a long-term South Australian copper output target of 650,000 tons per year. The South Australian copper business is expected to contribute 0.9 percentage points to the compound growth rate (CAGR) of BHP's copper-equivalent production from FY2027–2035, with overall group copper-equivalent output CAGR at roughly 3.4%. Within the copper division's 5.1% CAGR, 2.0 percentage points come from South Australia, making it BHP's second largest internal source for copper growth after Vicuña, bringing an incremental 283,000 tons of copper-equivalent capacity.

Gold, Silver, and Uranium By-products Provide Significant Value Flexibility, Sharply Lowering Net Copper Production Costs

South Australia's Olympic Dam is a polymetallic co-deposit, where gold, silver, and uranium oxide by-products can offset copper mining and refining costs substantially. Morgan Stanley estimates for FY2027–2036, by-product revenues can cover about 90% of the total unit mining costs for the South Australia copper mines; in comparison, Escondida's figure is just 26% and Spence's 22%.

Under the full capacity scenario of 650,000 tons copper per year, with the SRE fully commissioned, expected annual by-product outputs include 893,000 ounces of gold, 3.95 million ounces of silver, and 4,900 tons of uranium oxide. Sensitivity analysis shows: every $100/oz increase in gold price boosts South Australian copper mines’ NPV per share by AUD 0.14, reducing unit net copper costs by $0.07/lb; every $10/lb increase in uranium price similarly raises NPV per share by AUD 0.14 and lowers unit copper cost by $0.07/lb. Using current spot commodity prices, the NPV per share of South Australian copper increases from the base scenario's AUD 10.05 to AUD 15.03, almost a 50% increase; average net copper unit cost for FY2033–2040 could even drop to -$0.26/lb (by-product revenue exceeding copper costs).

The report also highlights that the uranium business has long-term optionality value. Under current SRE plans, uranium output is about 4,900 tons per year, though earlier BHP expansion plans for Olympic Dam envisioned up to 7,000 tons or even 19,000 tons per year; with future scale-up and wet metallurgy expansion, uranium output could further increase. SRE expansion will also enhance internal recovery of precious metals, reduce external concentrate sales losses, and thereby boost actual gold and silver recoveries.

Six Key Observation Areas for Site Inspection, Multiple Risks Warrant Caution

The on-site investigation scheduled for November for the South Australia project is a key catalyst to validate project prospects. Morgan Stanley will focus on six areas: 1) the roadmap for each mine to reach 500,000 tons/year copper output, Olympic Dam's 10 million ton block caving timeline and unit cost; 2) SRE smelter expansion construction scale, mine-smelter commissioning timeline, and potential for acceleration; 3) progress of northern water and power infrastructure construction, ownership, and any off-balance sheet commitments; 4) proportion of in-house concentrate processed versus sold externally, and logistics plan for sulfuric acid exports; 5) project commissioning requirements, pre-construction works and remaining regulatory approvals; 6) timeline and scale of Oak Dam (Ankata) and Olympic Dam Deeps (OD Deeps), supporting the second-phase 650,000-ton capacity goal.

The report also lists key downside risks. First is capital expenditure overshoot: Morgan Stanley's baseline assumes phase 1 capex at $14.1 billion for FY2028–2035, 7% higher than BHP’s inflation-adjusted upper guidance of $13.2 billion. While mine and concentrator capex intensity of $18,000–$23,000 per ton copper-equivalent remains competitive globally, construction complexity, smelter integration and external infrastructure could push actual spend even higher.

Second are execution and ramp-up risks. The project involves multi-link coordination between mine development, concentrator, SRE smelter expansion, and if Carrapateena or Olympic Dam block caving, smelter commissioning, or northern water supply project face delays, production ramp-up and free cash flow inflection points will also be delayed. Block caving itself carries uncertainty around extraction rate, ore grade, and the timing of cost savings versus model assumptions.

On the approval front, despite the new long-term Olympic Dam development agreement resolving state-level policy barriers, the SRE and various mine expansions still require individual environmental and development approvals, introducing potential risks of regulatory delay.

At the Group Level: Copper Business Share Continues To Rise, Asset Monetization Offers Financial Flexibility

Looking at BHP overall, Morgan Stanley forecasts FY2027 EV/EBITDA at 7.6x, above the historical 2019–2026 average of 6x. The core reason is that copper's share of group EBITDA will increase from 19% in FY2020 to 56% by FY2027, supporting a valuation premium for the copper growth story.

The company’s balance sheet remains healthy, with FY2027 net debt/EBITDA forecast at just 0.3x, supporting both major copper mine capex and ongoing shareholder dividends. Beyond organic expansion, BHP still has room for asset monetization: the company has already realized $6.3 billion from the Antamina silver stream and WA iron ore power collaboration, leaving a $3.7 billion gap to its $10 billion asset release target; there are further opportunities in selling 15–25% of the Jimblebar iron ore stake, Hay Point port, Escondida desalination plant, and Chilean power assets, which would bolster financial flexibility and reduce the need for external M&A.

The report sets three scenarios for BHP: a base case target of AUD 61; under a bull case, with approvals progressing smoothly, capex under control, and strong commodity prices, the target rises to AUD 100.6; under a bear case, with weaker Chinese steel demand, copper project delays, and severe capex overruns, the target drops to AUD 42.4.