By Tim Seymour
BHP Billiton (NYSE:BHP) is the grand-daddy of the miners: largest, best balance sheet, and most diversified. Last night they reported earnings that beat by 12% and added a handful of goodies that investors are applauding in the stock price this AM, and may read through to the entire beleaguered sector.
BHP Billiton reported numbers that were helped by tax effects that boosted the profitability but they also showed significant cash flow creation and stated that iron ore production was at record levels.
BHP Billiton indicated that they expect overall debt levels to be around $25Bn end ’14 which implies that there is room for them to make an increase in the dividend, as well as buyback stock.
We would continue to argue that miners remain well positioned to benefit from mild re-acceleration in Europe and overall improved conditions globally. We also have always argued that not all balance sheets are a like in the mining space and best of breed, with diversified production leaves investors most insulated from the uncertainty of the global economy, but also the supply issues that plague a number of the core metals and bulks. Iron ore, for example is expected to see more supply into YE’14 that should weigh on prices. We noted that BHP Billiton raised ore production to record levels in this reporting period but the company is also one of the lowest cost producers globally and could win in a price war. BHP Billiton continues to divest non-core assets and promoted efficient capital allocation within the company.
The stock already has had a nice run rallying 8 straight days including +3% this AM yet remains near the lower end of a range it has traded in since trading off the peak levels in April 2011. Around $72 there is decent resistance and it might be worth playing a test and fail of that level looking for your entry level. Risk reward says the downside of the range is $60 where it tested in May/June 2012, 2013 but that overall this well run giant is building up momentum to trade higher with these numbers.
The read through to the rest of the sector remains solid. Continue to watch those players leveraged to improved demand in the US and Europe where balance sheet issues are not weighing on the stock.