On Oct 1, we issued an updated research report on BHP Billiton Limited
(BHP - Free Report
) . Increased cash generation, lower debt levels and higher operational efficacy are likely to strengthen BHP Billiton's competency in the near term. However, headwinds like stiff mining market rivalry and oversupply situation in the market may weigh on the company's results in the quarters ahead.
Let's delve a little deeper and analyze the factors impacting the stock.
Focus on Investments to Drive Growth
At the end of fiscal 2018 end, BHP Billiton had five major projects under development in petroleum, copper, iron ore and potash, with a combined budget of $10.6 billion.
In June, BHP Billiton announced that its board has approved capital investment of $2.9 billion in the South Flank project in central Pilbara, Western Australia. With this, the company added a major project to its portfolio. The project will replace production from the 80 million ton per annum (Mtpa) Yandi mine when it reaches the end of its economic life. It is due to become operational by 2021 and expected to produce ore for more than 25 years.
Recently, BHP Billiton has entered an agreement to acquire 6.1% interest in SolGold Plc for $35 million. With this, BHP Billiton will gain shares in SolGold's flagship Cascabel porphyry copper-gold project in Ecuador. It is claimed to be a highly prospective deposit, with indicated and inferred resources of 1.08 billion tons (Bt) at 0.68% copper equivalent, with a contained metal content of 5.2 million tons (Mt) of copper and 12.3 million ounces of gold. BHP Billiton along with other miners like Rio Tinto plc (RIO - Free Report
) , VALE S.A (VALE - Free Report
) and Anglo American plc (NGLOY - Free Report
) are keen on investing in copper assets to capitalize on the long-term fundamentals of the metal.
Strong Cash Flow Aids Debt Repayment
In fiscal 2018, the company generated free cash flow of $12.5 billion — the second consecutive year above $12 billion — driven by robust operational performance and higher prices. BHP Billiton is steadily lowering debt with increased cash generation. As of fiscal 2018 end, net debt was at $10.9 billion, down from $16.3 billion as of fiscal 2017 end and $26.1 billion as of fiscal 2016 end, reflecting capital discipline and strong free cash flow. The company intends to keep its net debt at the lower end of its target of $10-$15 billion.
The company also remains focused on providing increased returns to shareholders through robust dividend payments. The company will pay a record dividend of 63 cents per share, which includes an additional amount of 17 cents per share, above 50% minimum payout policy (equivalent to $0.9 billion).
Simplified Portfolio to Generate Shareholder Returns
BHP has entered into agreements for the sale of its entire interests in the Eagle Ford, Haynesville, Permian and Fayetteville Onshore US oil and gas assets for a combined consideration of $10.8 billion, payable in cash. The sale of the onshore U.S. assets is in sync with its long-term plan to persistently simplify and strengthen its portfolio to generate shareholder value and returns. BHP Billiton plans to return the net proceeds from the transactions to shareholders.
What's Hurting the Stock?
BHP Billiton's productivity gains guidance is at approximately $1 billion for financial year 2019, with strong momentum carried into financial year 2020. This guidance has been lowered from $2 billion over the two years to the end of financial year 2019, owing to the announced divestments. In the short term, supply growth from seaborne high-quality iron ore suppliers and ample low-grade inventories at Chinese ports are expected to put a cap on iron-ore prices.
Moreover, other industry-specific headwinds such as unfavorable government mining policies, an oversupply situation in the market or stiff business rivalry remain causes of concern for the company.
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