JPM-BHP and RIO Deep Dive：Long-term Pilbara iron ore outlook...-20250917

In our latest Pilbara iron ore asset review we highlight: 1) BHP has completedstudies on Pilbara 330Mt, concluding it will not pursue this capacity expansion inthe near term (but is still moving ahead with 305Mt); RIO still needs to approve~40Mtpa of replacement capacity that facilitates a move to 345-360Mtpa, withRhodes Ridge additionally targeted at 40Mtpa before the end of the decade (we runRIO at 350Mtpa LT), 2) RIO has 5 projects with capex of ~$8.5bn to complete(100% basis) prior to 2030, while BHP’s spend is more modest at $3-4bn, and 3)our LT EBITDA/t favours BHP by ~$4/t (narrowing from ~$7/t currently once RIObrings on Rhodes Ridge), with our unit costs set ~$4/t above medium-term costguidance for each company. Overall, BHP generates around $14.8bn higher FCFover the next 10yrs in the Pilbara vs RIO (at an average nominal price of $87/t).From an investment standpoint, RIO now trades marginally cheaper on a P/NPVof 0.91x vs BHP at 0.93x, and with a 2026 EV/EBITDA of 5.5x (BHP 6.3x), withits yield at 4.2% vs BHP at 3.6%. BHP has outperformed RIO ~6% YTD. We don’tsee a compelling reason for this to continue. RIO’s cheaper metrics lead us to rotateour preference to RIO over BHP, but we retain both on Overweight ratings.

•RIO has a busy decade ahead, 130Mtpa replacement capacity underway,with Rhodes adding another 40Mtpa: RIO has completed the 25MtpaWestern Ridge mine for $2.4bn ($96/t), but there is still 105Mtpa ofreplacement capacity to execute this decade. Brockman Syncline 1, and HopeDowns 2, are both approved ($53/t capex), while the West Angelasreplacement (25-30Mtpa) and Greater Nammuldi project (10-15Mtpa) areawaiting approval (at lower capital intensity at ~$30/t JPMe). Further, the40Mtpa Rhodes Ridge project is targeted for completion before the end of thedecade, which is likely to be around $100/t capex, in our view (Phase 2 growthto 100Mtpa is post 2030). All up, RIO will deploy another ~$8.5bn of capex(100% basis) on iron ore projects before the end of the decade, but the rewardwill be achieving 345-360Mtpa capacity, from ~330Mtpa in recent years. RIOexpects medium-term costs at $20/t (in 2023 dollars), which works out to be~$24/t in 2030 terms (JPMe $27/t). Last reported unit costs were $24.3/t in1H25, highlighting the need to beat inflation every year to achieve the target.By 2035, we expect a step change lower in RIO’s unit costs as Rhodes Ridgeramps up (replacing higher cost operations).