BHP Billiton Will Surge On Better Margins, Gold Prices

Apr.16.12 | About: BHP Billiton (BHP)

BHP Billiton (BHP) is one commodity stock that should be part of your investment portfolio, considering its significant growth opportunity in the next six months. A quick analysis of the current commodities markets proves that there is great potential for BHP's growth.

This potential arises because, as analysts point out that, commodity prices are unlikely to go soft, given the ongoing crisis in Europe with debt, along with the artificial low-level interest rates the Federal Reserve insists on continuing and the ensuing presidential elections, as also the sluggishness in Chinese growth rates.

Additionally, a report from within the gold industry offers great hope for investors now. GFMS chairman, Philip Klapwijk, says: "The market is expected to rise to new highs by early 2013, after struggling this year against a backdrop of softer demand in key physical markets and slackening investment appetite for bullion."

Globally, the commodities investment scenario also looks more attractive, as the continued fall in Chinese consumption rates increasingly affects exports, resulting in a substantial fall in stock prices of most companies worldwide.

Being one of the world's largest commodity producers, BHP's product types spans precious metals: gold, silver; copper, energy coal, metallurgical coal, nickel, silver, as well as titanium minerals and uranium along with substantial investments in oil and gas.

The company has a primary listing as BHP Billiton Limited on Australian Securities Exchange, and a premium listing as BHP Billiton Plc on the London Stock Exchange. On the New York Stock Exchange, BHP has two ADR listings.

The BHP stock price on the precious metal market is structured cyclically on the products the company mines. Even a year ago, gold, natural gas, and coal prices were higher, and were out of league for small investors. Now with prices of precious metals down to conservative levels, investing in good stock picks is the best step forward.

BHP, along with RIO, is leveraging its diversified portfolio and considering divesting its diamond mining. In Nomura, the brokerage firm's opinion is: "the outlook for the diamond market doesn't appear a significant driver of the divestment for BHP and Rio. The market has positive fundamentals with maturing mines and growing Asian demand." Nomura recommends a merger and public offering to maximize returns, instead of a divestment.

The firm also states: "Both companies are only considering divesting the assets, because they're no longer material contributors to their portfolio and their big growth pipelines in bulk commodities, energy and base metals that could generate higher returns."

BHP's move to divest diamond mining appears to be a long-term consolidation of non-performing assets and revenue earnings.

In fact, gold prices successfully reached peaks of $1,900 during the summer of 2011, while silver reached a maximum rate in May, 2011, with every ounce costing $48. After the spike, however, the price for gold has dropped steadily. Earlier this year and in the past few weeks, an ounce of precious gold has been trading anywhere from $1,590 to $1670. Silver prices have ranged from $30 to $33 per ounce.

For BHP, a fall in precious metal prices has affected its stock price over the last six to twelve months. Most of its commodity metals showed a drop of nearly 10% over last year. In the past five years, it has had a good run with revenues cresting high peaks. Looking at the last three months, poor performance due to the continued drop of global prices of commodities has led to analysts downgrading the per share earnings of $6.75 at the start of 2012, down to a current rate of $4.97 per share. Again, these earnings would be subject to basic prices of gold and silver not depreciating further.

Good performing peers in the precious metals category are Silver Wheaton (SLW) and Pan Am Silver (PAAS). Rio Tinto (RIO) also has a significant gold and precious metal's presence, and is a good option for investment. Silver Wheaton, with its 'streaming rights' policy, appears to be the best pick, since, being a non-mining major, it operates along fixed cost rates and predominantly on silver costs, thereby ensuring great profits. Analysts comment, 'An annual dividend of $0.38 is expected to yield 1.2%.' Pan Am Silver has grown at a phenomenal 500% and indicates an annual stock price target of nearly 50% and more on today's prices. Expectations are high with predictions of stock prices growing by 100% to 300%.

BHP too has shown considerable gold mining margin expansion. With banks also keen on gold stock, investments in gold and precious metal stocks such as BHP appear to be on the rise.

As GFMS Chairman Klapwijk says, "Prices could still drop sharply if a sudden move lower in stocks is seen. I personally think investors, looking at the more speculative end of the spectrum, are probably not as leveraged as they were at the end of the third quarter, and therefore the vulnerability of gold to sell off when the market is at risk-off mode is not as great as it was at times last year."

Klapwijk also says, "If we're looking at a $1,530 low for gold, that does build in an expectation that there is going to be a risk-off moment and that gold will probably be sucked under for a while." This indicates that precious metals stocks are the hottest picks under the current market forces.

BHP for gold and Pan Silver for silver are solid picks for anyone looking for diversity in an investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.