Dividends, data centres and dirt: Inside the resources rally

From copper and AI-driven demand to rising capex and execution risk, Portfolio Manager for the Fidelity Australian Equities Fund, Sam Heithersay and Mining Analyst, Cameron Taylor examine the forces shaping the next phase of the resources rally.

Edited transcript

Lukasz de Pourbaix (LDP): BHP has had one of the strongest results in 160 years. It's up roughly 40% year to date and has been a key contributor to overall index performance. Its performance is more symptomatic of the broader mining sector which has been a very strong performer in recent times.

Do you think this is a genuine step change for BHP, or do you think the market is getting ahead of itself?

Sam Heithersay (SH): As a former mining analyst, I would always say that we tend to over-extrapolate at both the peaks and troughs of the cycle, building structural arguments around what is ultimately a very cyclical story. You can never really fall in love with a cyclical business and project too far into the future because, at the end of the day, it's still subject to the commodity cycle.

Right now, we have BHP (ASX: BHP) trading around all-time highs, riding the wave of its copper growth and exposure. Copper accounted for 54% of earnings in this result. That said, like any cyclical commodity, those dynamics can change over time. It's important, however, to acknowledge that there have been some meaningful shifts in the business model.

The first is the pivot from iron ore towards copper. BHP has been on this path for a long time, positioning itself around commodities that are increasingly important for the future. We've also seen leadership change, with a new CEO at BHP and, incidentally, at Rio Tinto (ASX: RIO), its main Australian peer.

Those leadership changes have brought a stronger focus on productivity and efficiency. Both companies have announced cost-saving targets, and that discipline has certainly supported the result we've just seen. 

Asset divestments helped drive a dividend beat, and what we have now is a company operating from a position of strength, with significant leverage to copper, increasing capital expenditure, growing dividends beyond expectations, and maintaining a disciplined approach to costs and productivity.

All of that sounds very positive and could prove to be a genuine step change in how the business is managed compared with its history. But I'd still caution that there is a cyclical dynamic we need to remain aware of, both for BHP and the resources sector more broadly.

Cameron Taylor (CT): We've had a strong FY26 for commodities. Gold prices reached record highs, copper remained strong, lithium rebounded, and aluminium also contributed positively. Together, that delivered a significant revenue uplift across most commodity producers and drove stronger-than-expected dividend outcomes in the FY26 results.

Broadly across the sector, dividends came in around 6% ahead of expectations, although the picture varied by commodity. At the same time, we're seeing a step-up in investment, with analysts increasing their FY27 capital expenditure forecasts by about 13%. We're also seeing higher operating costs and inflationary pressures flow through the sector.

As a result, earnings expectations are coming down despite strong revenue growth. That points to a more mature stage of the commodity cycle, where companies are investing for growth but facing higher cost pressures.

Even so, the sector has been the standout performer on the ASX year to date, supported by strong commodity prices and solid operational performance.

LDP: The other side of the equation, if you reflect on the sector and on companies like BHP, what are the potential key risks investors should be aware of?

CT: Commodity prices are clearly a big part of the story. Some are trading near all-time highs, with copper at around US$5.50 per pound, well above historical levels. The key question is whether that strength reflects a structural shift in demand or is being driven by anticipation of potential tariffs.

The US is considering a 15% tariff on copper imports from January next year, although nothing has been confirmed yet. If those tariffs don't eventuate, we could see some of the recent price strength unwind. We've already seen unprecedented levels of copper inventory build-up on Comex in the US, while inventories on the LME and Shanghai exchanges have remained relatively low.

If the tariffs aren't implemented, that inventory imbalance could start to reverse. Having said that, there are still genuine demand tailwinds, particularly from AI-related infrastructure and data centre investment, which could continue to support copper prices.

At this stage, it's really a wait-and-see situation. There are credible arguments on both sides, and we'll need more clarity on tariffs and underlying demand trends before we know whether current price levels are sustainable.

SH: At a company-specific level, one of the key risks we'll be watching closely for BHP is project execution. The new CEO has committed to delivering several major growth projects, including the Jansen potash project, which has already experienced cost overruns.

More broadly, around two-thirds of BHP's growth capital expenditure is expected to be directed towards copper, with several large and complex projects underway. That includes the development of the Vicuña project in Argentina, expansions at Escondida in Chile, including a new concentrator, and the continued expansion of its South Australian copper assets.

I'll be visiting those South Australian operations in November to get a better sense of the execution challenges and opportunities. It doesn't mean BHP won't deliver on these projects, but the level of execution risk is certainly increasing as the scale and complexity of the investment programme grows.

Project execution risk is something that exists across the mining sector, and we tend to see it move in cycles. Right now, we think we're entering a period where the market will become increasingly focused on BHP's ability to deliver these projects on time and on budget, which means the perceived execution risk is likely to continue rising.

LDP: The resource sector comprises a large part of the Australian equity index. How are you thinking about resources in the context of portfolio positioning?

SH: We've been overweight resources for some time, and BHP has been a key contributor to that positioning. As a result, we're very comfortable with how the portfolio has been structured, particularly as BHP has reached all-time highs.

There's been some commentary around other funds that may have been underweight resources or BHP, and the challenges that can create given BHP's significant index weight. That's not a concern we share, having already had strong exposure through both BHP and several other resource holdings.

Importantly, our investment case hasn't been driven by a top-down commodities view. It's been built from the bottom up, with company-specific opportunities driving many of our resource positions. What we've been discussing today, however, does point to the possibility of a broader structural shift in the way this commodity cycle is unfolding.

In previous cycles, such as the China-led commodity supercycle, it was relatively easy to identify the primary source of demand. This cycle looks different. Rather than being driven by a single country, it's being supported by a range of powerful themes, including the renewable energy transition and the build-out of AI and data centre infrastructure.

Those demand drivers can be harder to quantify, but they're no less important. They provide meaningful tailwinds for resources and help explain why we're comfortable maintaining exposure to these global themes, particularly when some more domestically focused consumer and yield sectors may face greater challenges.

That's reflected in how we've positioned the Fidelity Australian Equities Fund. While our stock selection remains firmly grounded in bottom-up analysis, we're also increasingly comfortable that some of the structural trends we're seeing, particularly in copper, could persist for longer than many expect. It won't look exactly like the last commodity cycle, but it will certainly rhyme.

LDP: For investors that may already have exposure to the sector or are looking at entering the sector, what are the key things to consider over the upcoming 12 months?

CT: Well, it's a fascinating question because October could be a pivotal moment for the sector. Glencore, a company with a market capitalisation of around US$70 billion, is considering a secondary listing on the ASX. CEO Gary Nagle has spoken about accessing Australia's growing pool of long-term capital, particularly through the superannuation system.

If it proceeds, Glencore will provide investors with another highly liquid, diversified way to gain exposure to copper. That could shake up the market somewhat and potentially reduce some of the scarcity premium that investors currently place on other copper-exposed names. At the very least, it would give investors another option alongside the dominant exposures we already have through BHP and Rio Tinto.

What makes Glencore particularly interesting, however, is that it operates under a slightly different model. Around 30% of its earnings come from its marketing business, which can be more difficult for traditional resource investors to analyse and value. It also retains significant exposure to thermal and metallurgical coal, which may make it less attractive to some funds with ESG or mandate constraints.

October will be an interesting test for the market. It will tell us a lot about investor appetite for diversified resource exposure, how the market values Glencore's unique business mix, and whether investors are looking for alternative ways to gain exposure to the long-term copper theme.

SH: Another theme we've been discussing a lot is the growing dispersion within the mining sector, and even among companies exposed to the same commodity, particularly when it comes to project execution and capital expenditure.

In the gold sector, for example, we're seeing several companies looking to develop new mines and build processing plants at the same time. In that environment, it's going to be increasingly important to identify which companies are best positioned to execute successfully and which are more exposed to risks around cost overruns and timeline delays.

That's where management quality becomes critical. We spend a lot of time assessing whether a company has the engineering capability, operational expertise and project management discipline required to de-risk major developments and deliver against key milestones. We're already starting to see differences emerge between companies on that front.

The broader cycle remains supportive for miners, but ultimately the winners will be those that can convert investment into returns and generate sustainable free cash flow. As capital expenditure ramps up across the industry, competition for labour, equipment and expertise is likely to intensify.

History suggests that when everyone is building at the same time, some projects inevitably run over budget or fall behind schedule. That's why we're increasingly focused on execution. In our view, the companies that manage this phase of the cycle most effectively will be the ones that create the most value for shareholders.

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