BHP Group Ltd (ASX: BHP) is a mining giant.
The company is a major producer of iron ore and metallurgical coal, both of which are key to steel production.
It also claims to hold the world's largest copper resource base – a critical metal for industrial use as well as the accelerating global energy transition.
Finally, it owns nickel assets in Western Australia and is progressing toward production of a significant potash project in Canada – a mineral used to make fertiliser.
However, renowned Aussie investment house Macquarie Group Ltd (ASX: MQG) has just downgraded BHP shares from outperform to neutral in a research report released on Friday.
More specifically, Macquarie has set a 12-month share price target of $41.00 apiece.
This forecast represents a meagre 0.5% upside for investors from yesterday's closing share price of $40.80.
Let's find out why.
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Macquarie has its say
Macquarie's downgrade followed BHP's fourth quarter and full year operational update announced last Friday morning.
Here, BHP revealed a strong performance headlined by record annual production of iron ore and copper.
It also reported production growth across all key commodities in the fourth quarter.
In this regard, Macquarie noted that BHP outperformed on most metrics during the quarter, with its guidance for FY26 also falling in line with consensus.
So why the downgrade?
The key driver behind Macquarie's shift in stance appears to be its cautious outlook for iron ore prices.
In a nutshell, the broker expects weaker iron ore markets in the next couple of years.
It said:
With the recent iron ore strength and BHP's performance, we downgrade to Neutral with iron ore weakness expected in FY26/27.
Despite the downgrade, Macquarie still prefers BHP over another ASX 200 mining titan, Rio Tinto Ltd (ASX: RIO).
Battle of the giants
Macquarie cited three main reasons for its preference for BHP shares over Rio Tinto.
It stated:
We still prefer BHP to RIO on asset quality grounds, a narrow valuation gap and closer growth trajectory, but we see more value in non-iron ore exposures.
To elaborate, Macquarie believes that BHP is less likely to be impacted by weaker iron ore prices.
This is due to BHP's lower earnings correlation to the metal when compared with Rio Tinto.
The broker's view was also influenced by BHP's lower production costs, as well as its portfolio of projects being located in lower risk jurisdictions.
Finally, Macquarie expects BHP to outpace Rio Tinto in copper production growth over the next couple of years.
However, the broker noted that it may revisit its view once Rio Tinto's Simandou iron ore project in Guinea approaches mining.
Simandou is regarded as one of the largest undeveloped iron ore projects in the world.
