We have upgraded our recommendation on BHP Billiton Limited (BHP) from Underperform to Neutral.
We believe that thelong-term structural drivers of industrialization and urbanization in the developing world will remain intact. Hence, optimism for general commodities demand based on worldwide industrial and infrastructural progress will continue to post financial gains for the company, going forward. In this likely scenario, BHP,a uniquely diversified resources company, is well positioned to take advantage of the economic transition.
Moreover, BHP Billiton has been adding momentum to its approved pipeline of high-return growth projects, diversified across commodity, geography and customers. Prioritizing investment focusing on large, long life, low cost, expandable and upstream assets continue to reinvigorate our growth outlook. Besides, investments in energy coal and petroleum expansion also look impressive.
However, the company isclearly not immune to industry-wide cost pressures. While equipment shortages are challenging the industry, labor crisis remains critical too. Metal product prices remain volatile reflecting a general swing in market sentiment. Besides, worldwide mining cost inflation, governmental delays, depleting natural resources as well as high-cost competitorsfurther increase the company’s operational costs. In addition, margin compression for nickel, aluminum and manganese alloys over the last few quarters has remained as a matter of nagging concern for BHP.
A substantial increase in higher grade ore copper production at Escondida, strong production from Queensland Coal and drilling development at non-operated Gulf of Mexico facilities are anticipated to deliver high margin production for miners. including BHP. However, such an attempt to improve the quality of ore grades, in order to stay competitive, leads to higher expenses for the company. Moreover, BHP faces execution risk from natural calamities like tropical cyclones, severe monsoon, or flooding, which potentially disrupts mining operations. An upsurge in oil prices and rising core inflation in the emerging markets add to the blow.
We are concerned about a slower global growth rate, fallout of a fluctuating U.S. as well as worldwide economy. These may impact the demand for the company’s products, dampening revenue growth, going forward. Moreover, the metals and minerals market remains highly competitive, especially in the European and Asian countries, in addition to other overseas markets, based on price, quality, range of products, reliability, and transportation costs.
Hope survives as we foresee BHP Billiton’s extensive growth program within which six project hubs are already fully operational, delivering career opportunity to skilled personnel. The company’s centralized procurement of key input components reduces its exposure to tight consumable and mining equipment markets. Mention may be made of long-term partnerships with suppliers, who ensure certainty of access to raw materials.
BHP’s strategic acquisitions as well as extensive organic growth program across geographies are also expected to generate positive business under all market conditions. However, such divergence exposes it to the risk of fluctuations in foreign exchange rates, which may have a significant impact on the company’s financial results going ahead.
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 company competes directly with its peers, such as Alcoa Inc (AA), Vale S.A (VALE) and remains positive on the outlook for an improving global economy driven by urbanization and industrialization, in the future ahead.
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