- By Richard A. Cox
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BHP has failed to capitalize on broader trends in metals that should have been supportive for the stock.
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Long-term rallies are overdone and there is much stronger potential for downside from here.
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Strategy changes provide argument for alternate view but have yet to produce sustainable results.
BHP Billiton Ltd. (BHP) is a global mining company headquartered in Melbourne, Australia. The company produces various commodities that include petroleum, iron ore, metallurgical coal, copper and uranium. BHP Billiton sells its products directly to its customers through supply agreements and also on global commodity exchanges. Its businesses include Minerals Americas, Minerals Australia, Petroleum and Marketing.
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Warning! GuruFocus has detected 6 Warning Signs with BHP. Click here to check it out.
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The intrinsic value of BHP
According to reports released Oct. 18, the company's quarterly iron ore production was 58 metric tons (versus 61 metric tons a year ago). This roughly falls in line with what was seen in quarterly copper production which came in at 355 (377) kt and petroleum production which came in at 55 (65) mmboe compared to the same quarter a year ago. Overall, these are somewhat lackluster numbers that could be viewed as either stable or subdued, depending on your point of comparison.
Management directions
In terms of strategic modifications, Woodside acquired half of the Scarborough assets held by BHP and paid $250 million on the completion of the transaction (effective from July 1). This is helpful in terms of the ways the company is showing markets its geographical preferences going forward. On June 26, the company announced that it will invest $900 million in exploration in the next financial year, which is 18% of its overall capital budget.
Clearly, some changes will be required as many of the performance inputs posted by BHP have not met the company's standard. BHP's financial year ended June 30 and annual statutory attributable losses stood at $6.385 billion (versus profits of $1.91 billion a year ago). Revenues for the year were down 31% to $30.912 billion, so the fact that analysts are expecting profit for the year ending 2016 should be viewed as a potential turnaround period. This is largely why analysts are still showing some bullish sentiment on the stock, expecting earnings of 76 cents per share for the financial year ending in 2017. But the real question is whether or not this is providing the headwinds needed to encourage new buy positions in the stock. If this is not the case, we could see some substantial declines from current market levels.