We recently downgraded our recommendation on BHP Billiton Limited (BHP) to Neutral from Outperform.
The downgraded rating is backed by the execution risk and interruptions in the mining operations that the company has been facing over time, due to natural disasters, devastation of industrial infrastructure like power, logistics, etc.
Moreover, delays related to government permit toward project development and civil engineering have also been leading to higher operating cost for the company over a considerable period.
Moreover, upsurge in oil prices, rising core inflation in the emerging markets along with the risk of reoccurrence of another downturn in the U.S. economy or a slower global growth rate may also prove detrimental to the company’s growth.
However, the company is well-positioned to leverage the advantage of the ongoing industrialization in China, India, and other developing economies supported by the rising demand for steel, driven by the construction and automotive industry.
The company has been dominating the steel raw material industry based on its diversified portfolio of low cost and high quality assets. BHP’s strategic acquisitions as well as extensive organic growth program are further expected to retain its market position and expand beyond.
Conversely, we are concerned about the global iron ore grades, which have been declining over time. Any improvement in such ore grades is expected to raise production costs further to survive the competitive environment. Moreover, we remain on the sidelines based on the company’s geographical divergence, which exposes it to the risk of fluctuations in the foreign exchange rates.
BHP Billiton is one of the world’s largest diversified resource companies operating in mineral exploration, production and processing, oil and gas exploration and development, and steel production and merchandising. The merger, as a part of the company’s key investment strategies, is expected to sustain the company’s commitment to its long-term growth. The company competes directly with its peers, such as Alcoa Inc. (AA), Vale S.A. (VALE).
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