BHP Billiton Limited (BHP.ASX)

Fat Prophets

Monday 9th November 2015

Hot Stock - BHP Billiton Limited (BHP.ASX)

Iron ore at a trot

What’s new?

BHP Billiton has reported its first quarter 2016 operational activities to 30 September 2015. Having hived off its exposure to a number of metals through the South 32 demerger in 2014, BHP Billiton now reports four operating segments – iron ore, petroleum, copper and the coal complex with nickel as a legacy.

The company’s iron ore operations set a new quarterly production record on the ramp-up of the Jimblebar mine in Western Australia. Iron ore production for the reported quarter rose by 7.4% on the corresponding period in 2014, to a record 61.3 million tonnes.

Increased production out of the Pilbara (Western Australia Iron Ore, BHP’s interest 85% across five sites) was again the highlight for the reported quarter. BHP has for some time now been focussed on productivity gains and debottlenecking activities across its Pilbara operations, activities that are having the desired impact on production.

In contrast to iron ore, BHP Billiton’s petroleum operations turned in a poor quarter, with production on a barrel of oil equivalent (boe) basis falling 4.3% on the same quarter in 2014, to 64.5 million boe. Both components of the company’s petroleum operations (i.e. oil and gas) reported lower production numbers for the quarter.

For the September quarter 2015, copper production came in lower at 377,000 tonnes. Production was lower by 3.1% compared to the corresponding quarter in 2014, with this due in part to lower grades at Escondida that were partially offset by a better performance from Antamina.

In terms of BHP Billiton’s coal complex, the company reported no major changes in production, with thermal production in the US and Australia having been offset by higher contributions from Columbia, while metallurgical coal production was flat.

Outlook

Overall, Fat Prophets believe that BHP Billiton delivered a reasonable first quarter operational result for 2016, particularly within the context of sluggish macro demand. For this reason, we take great comfort from the fact that BHP Billiton has reiterated its 2016 production guidance for each of its operating segments.

The company’s strategy of investing capital to develop long-term tier 1 projects from within its own portfolio remains a priority. The key advantages in developing brownfield projects are less capital intensive and shorter development times, which are keys in a weak commodity pricing environment.

In Fat Prophets view, it has been BHP Billiton’s ability, in the current environment, to utilise these advantages that has allowed the company to maintain its low operator cost advantage across its key operations. Fat Prophets continue to believe that BHP Billiton has the financial capability and capacity to deliver shareholder value across commodity price cycles.

Price

Fat Prophets believe BHP is attractively priced at current levels, with the company’s shares trading at 16 times FY17 earnings and offering a dividend yield of 7.1 percent.

Worth buying?

Fat Prophets remain favourably disposed to an investment in BHP Billiton given its diversification by product and region, its relative position on the cost curve, its strong capital position, and its current attractive valuation metrics, particularly on a through-the-cycle basis.

David Lennox is a Senior Analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE.

Disclosure: BHP Billiton is held within the Fat Prophets Mining and Resources, Concentrated Australian Share and Concentrated UK Share portfolios.

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