On Feb 29, 2016, we issued an updated research report on premium basic materials company, BHP Billiton Limited BHP. The company is one of the world’s largest diversified resource firms, with operations spread across several continents. It is involved in mineral exploration, production & processing, oil and gas exploration and development, and steel production. However, irrespective of its success in global trade, the company remains challenged by external market headwinds.
Scope for Improvement
BHP Billiton aims to enhance cash returns and shareholder value on the back of greater financial flexibility and a well-managed portfolio of high-return growth opportunities. Over time, the company has strategically built a portfolio of less expensive, large and long-life assets in a set of preferential commodities. After considering the accumulation of lower grades from the Escondida plant, BHP Billiton aims to accrue $2.1 billion worth gains at the end of fiscal 2016. Furthermore, having retained a couple of value-augmenting, high-return projects, the company aims to achieve greater liquidity by reducing its capital expenditure by $3.5 billion in fiscal 2016 and fiscal 2017. These accumulated funds can be used for financing growth projects or enhancing shareholder value over the long haul. Nonetheless, the company has lately established a new operating model in a bid to make its business less agile amid the disturbed mining market. As per this model, BHP Billiton would concentrate on three aspects of assets – safety, cost and volume. Also, BHP Billiton makes heavy investments in big projects. We believe that the successful completion of these projects would strengthen the company's financials in the upcoming quarters.
Existing Business Issues
The current macroeconomic situation has posed several challenges to the mining industry. Sluggish economic growth in several emerging markets, weakening demand from a major industrial goods consuming nation like China, uncertainties in financial markets, and volatility in the energy markets are all hurting the top- and bottom-line performance of BHP Billiton. Moreover, dismal commodity pricing continues to affect the company’s revenue. Market prices of certain major products offered by the company, such as iron ore, bauxite and copper, are gradually falling. Further, competitive threats from rivals expose BHP Billiton to risks of market share loss and compel it to adopt price-cutting programs, which, in turn, affect its revenues.
Zacks Rank
BHP Billiton currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Capstone Mining Corp. CSFFF, UR-Energy Inc. URG and American Vanguard Corp. AVD. All these three stocks hold a Zacks Rank #2 (Buy).
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