On Jan 19, 2015, we issued an updated research report on premium basic materials company BHP Billiton Limited (BHP). BHP Billiton is one of the world’s largest diversified resource firm with operations spanning over several continents. It is involved in mineral exploration, production and processing, oil and gas exploration and development, and steel production and merchandising
Existing Business Issues
Lately, BHP Billiton’s business is being adversely affected by certain external market headwinds such as equipment shortage and labor crisis. Also, volatile prices of metal as well as minerals are raising the operating expenses of the company.
Taking into account the fact that the company’s future prospects depend on its successful exploration and production efforts, operational risks like mining disruptions due to bad weather conditions may prove detrimental to its growth. Moreover, delays in government permits for project development and civil engineering have resulted in higher operating costs for the company over a considerable period.
BHP Billiton renders its commercial services over diversified geographical locations. Thus, it is also subject to currency and exchange-rate risks. Unfavorable fluctuations of these macroeconomic indicators can create severe profitability hazards for the organization.
Scopes for Improvement
BHP Billiton aims to significantly improve its business yield in the upcoming quarters on the back of its portfolio-simplification initiatives such as demerger of business. In fiscal 2014, over 96% of the company’s operating profit was generated by its core assets. Henceforth, the company aims to reduce costs without losing the benefits of economies of scale and diversity, as experienced by its manufacturing facilities.
BHP Billiton is revising its corporate structure by favorably trimming down its asset portfolio. Under this regime, the company is de-merging its nickel, manganese, aluminum, coal and silver assets. Ceasing the manufacturing in these asset firms can considerably lower the company’s operational costs in the near future, hence, improving its margins.
With a market capitalization of $122.76 billion, BHP Billiton currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the industry include Denison Mines Corp. (DNN), Platinum Group Metals Ltd. (PLG )and Alcoa Inc. (AA). All the three stocks currently hold a Zacks Rank #2 (Buy).
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