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BHP Billiton (BHP) Braves Headwinds on Robust Growth Drivers

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On Sep 21, we issued an updated research report on premium basic materials company BHP Billiton Limited (BHP).

Over the past six months, BHP Billiton’s shares yielded a return of 13.4%, outperforming 10.7% growth recorded by the industry.

Notably, the company’s earnings are projected to climb 5.6% over the next three to five years. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Inside Story

BHP Billiton reported robust earnings before interest, tax, depreciation and amortization (EBITDA) margin and earnings in fiscal 2017. The company noted that the improvement was primarily driven by elevated prices of major core metals and operating cash-cost improvements.

In the last three months, prices of this major steel-making component were up nearly 31.7% to $70.28 per ton as of Sep 20, 2017. The upside can be attributed to the release of Chinese manufacturing data, which revealed expansion of the country’s steel industry.

Continuation of this upbeat trend will likely bolster the bottom-line performance of BHP Billiton in the upcoming quarters.

BHP Billiton finances numerous growth projects and boosts shareholders’ returns on the back of increased free cash-flow generation. The company has been steadily boosting liquidity on the back of more efficient operations and increasing productivity gains.

In the past five years, BHP Billiton accumulated productivity gains worth $12 billion. Notably, another $2-billion gain is estimated to be realized by the end of fiscal 2019.

We also notice that the company is reducing capital and exploration expenses by exercising flexibility of Onshore plans in the United States and focusing on more capital efficient projects.

For instance, in fiscal 2017, exploration and capital expenses plunged 32% year over year to $5.2 billion.

Despite all the aforementioned positives, we believe certain lingering headwinds might dent the company’s near-term prospects.

The mining industry is highly competitive and dominated by few large companies like BHP Billiton, Vale S.A. (VALE - Free Report) , Rio Tinto plc (RIO - Free Report) and Cliffs Natural Resources Inc. (CLF - Free Report) . The number of new entrants is almost limited within the industry due to huge start-up costs involved in such businesses. In order to maintain competency, BHP Billiton makes costly investments to enhance productivity and minimize costs. However, these expenses weigh over the company’s overall debt burden.

Moreover, BHP Billiton’s revenue generation and profit-making prospects are highly sensitive to environmental hazards such as natural disasters and abnormal rainfall. For instance, high rainfall caused due to Cyclone Debbie (April 2017) largely affected power, logistics, access, and services of the company’s coal mines located in Queensland’s Bowen Basin.

Also, BHP Billiton’s commercial affairs depend on licenses and permits issued by the government. Changes in government policies might lead to situations where licenses are not renewed at all. Such circumstances adversely affect the company’s growth or productivity plans, thereby directly hampering its revenues and margins.

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