We upgrade our recommendation on BHP Billiton Ltd. (BHP) from Neutral to Outperform on increased production in the first quarter of fiscal 2011.
BHP Billiton reported higher production with a 6% year-over-year increase in its iron ore production and growth of 3%, 3% and 10% in its oil and natural gas, copper, and coking coal production, respectively. During the quarter, expenditure on minerals exploration and petroleum exploration was $129 million and $74 million, respectively. BHP Billiton also provided guidance of $900 million for petroleum exploration expenditures in fiscal 2011.
Based on the above, we increase our EPS estimate to $5.35 and $5.20 for fiscal 2011 and fiscal 2012, respectively. The gradual market recovery also supports our view on the company.
Further, we believe that the ongoing industrialization in China, the largest iron-ore importer, will improve the demand and price of its products in future. Fiscal 2010 bears evidence of the fact that both demand and prices improved due to strong recovery in China and India.
BHP Billiton’s commitment toward long-term growth through its key investment strategy looks promising with 20 projects on hand.During fiscal 2010, BHP delivered five growth projects and approved two major growth projects totaling $695 million and made pre-commitments totaling $2,237 million to start the work on four other projects. BHP Billiton at present has 20 projects on hand for a total budget of $25 billion.
The progressive dividend policy with fiscal 2010 dividend of 87 cents per share, up from 82 cents in fiscal 2009, enhances shareholders’ sentiments and inspires our optimism about the stock.
BHP Billiton has a competitive advantage in this uncertain environment based on its diversified portfolio of low cost and high quality assets. The company is well-positioned to benefit as the markets recover. The stock also currently retains its short term “Strong Buy” rating equivalent to a Zacks #1 Rank.
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