On Aug 29, 2013, we upgraded our recommendation on BHP Billiton Limited (BHP) to Neutral from Underperform, based on the company’s future growth potential.
Why the Upgrade?
We see improved future prospects for the company on the back of ongoing industrialization in China, India and other developing economies. BHP Billiton has a competitive advantage based on its diversified portfolio of low-cost and high-quality assets. This may help the company derive profits from industrial and infrastructural transition across the world. The company is also in the process of trimming its product portfolio to focus more on the competitive ones.
BHP Billiton has been reducing its costs to maintain its margins as well as profits, in the falling commodity prices scenario. In fiscal 2013, the company reduced its controllable cash costs by $2.9 billion year over year. The company plans to reduce its costs further in fiscal 2014, thereby increasing margins.
However, it can not be negated that BHP Billiton has been badly affected by a reduction in the prices of most of its commodities. Average selling prices of iron ore and coking coal declined 17% and 34%, respectively, year over year in fiscal 2013. Moreover, the risks associated with mining and exploration activities, like mining disruptions, also make us cautious. Additionally, BHP Billiton faces industry-wide pressure from equipment shortages, labor crises and volatile metal and mineral prices. Also, depleting natural resources call for an improvement in ore grade and subsequent search for new mines. This is expected to raise exploration and development costs as well.
To sum up, BHP Billiton had roughly 19 projects in the research and exploration stage exiting the fiscal 2013, most of which are expected to start production before the end of fiscal 2015. We expect to see a meaningful contribution to the company’s results from these projects.
Other Stocks to Consider
BHP Billiton currently carries a Zacks Rank #3 (Hold). Other stocks worth a watch in the mining industry are Avalon Rare Metals Inc. (AVL), Denison Mines Corp. (DNN) and US Energy Corp. (USEG). All these stocks carry a Zacks Rank #2 (Buy).
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