Profit From A Global Turnaround By Buying BHP Billiton Today

| About: BHP Billiton (BHP)

BHP Billiton (NYSE:BHP) is the largest diversified natural resources company in the world. The company is a major producer of commodities like iron ore, aluminum, copper, manganese, nickel, silver, titanium, uranium, energy coal, and metallurgical coal. The company also has interests in oil and gas.

BHP Billiton's results for the fiscal year 2012 were, as expected, disappointing because of the decline in the global demand for commodities, particularly from China. Total revenue remained flat, declining 0.7% on a year-on-year basis to just over $72 billion. Profit from operations declined by over 25% to $23.75 billion, while operating cash flow declined by nearly 19% to $24.3 billion. The economic conditions in the euro zone also contributed to the reduced revenues and profits, both in terms of direct imports, and the effect on China, for whom the euro zone is a major export market. Despite this, BHP did achieve record production in nine of its product segments, and a 12th consecutive year for production in Western Australian Iron Ore.

BHP Billiton's bright spots were its increase in average price realization for oil, which increased 19% year-on-year, and LNG prices, which rose by 29% over the previous year. Iron ore revenue rose by 10.7% to $22.6 billion, energy coal revenue rose 9.4% to $6 billion, and petroleum revenue rose by more than 20% to $12.94 billion. The development and integration of the company's shale liquid and gas producing assets contributed around 40% through an increase in revenue from petroleum. BHP Billiton has been successful in Louisiana and Texas, particularly in the Eagle Ford.

On a year-on-year basis, stainless steel revenue showed a decline of over 20%, while base metal revenue showed a decline of 18%. The average price realization for copper was down by 14%, and BHP Billiton reduced its extraction rate by 10% in response to reduced demand. In 2013, Chinese demand is expected to increase by 7% due to economic stimulus measures, and global demand is expected to increase by 5% as the global economy recovers.

Iron ore is a major business for BHP Billiton, accounting for nearly 30% of total revenues and 50% of total profits. The downturn in the market has forced iron ore prices down to a three-year low. Prices have declined by 35% from July levels. The markets have been sliding downwards as a reaction to reduced demands for steelmaking and inventory reduction, particularly in China. In just two months, iron ore tumbled nearly 30%. Experts expect prices to rebound towards the end of the year as the Chinese stimulus measures begin to bite and inventories begin to rebuild. Because BHP Billiton is so well diversified, I expect it to be able to ride out the downturn. Uncertainty in pricing hurts competitors like Vale (NYSE:VALE) far more than it does BHP Billiton.

Uranium is important for its use in power generation, and this will continue to sustain producers. BHP Billiton recently sold its wholly-owned Yeelirrie uranium deposit, located in Western Australia, to Cameco (NYSE:CCJ) at a price of $430 million. This is an undeveloped and dormant mine, and the company is likely better off concentrating on its other larger uranium mines, instead of spending a lot of money developing this one. Experts are upbeat about the prospects of the uranium industry. Many believe that BHP Billiton can manage to produce and sell at low prices because of its significant production of gold and copper.

A major competitor in the uranium business, Rio Tinto (NYSE:RIO), successfully operates uranium mines at Energy Resources of Australia Ltd. in Australia and Rössing in Namibia. Energy Resources of Australia Ltd. is the third largest global producer of uranium. Rio Tinto competes against BHP Billiton in selling uranium to the developing countries which generate power from nuclear reactors. Chevron (NYSE:CVX) has expressed its interest in uranium exploration in Kazakhstan, but the only concrete action that it has taken are exploration projects in McDermitt Caldera in the U.S. Cameco, on the other hand, has a very successful uranium exploration project in Kazakhstan, where the country's ruler, Nursultan Nazarbayev, has been particularly supportive of the company and its expansion plans.

BHP Billiton's management team is conservative and, though capital expenditure for the fiscal year 2013 is budgeted at around $22 billion, I expect this to be scaled back to conserve cash. The company has delayed projects with an investment of $68 billion, including the expansion of an iron ore port, due to the depressed global economy. It is also delaying the expansion of its Olympic Dam project, one of the largest sources for uranium, and one of the biggest potential sources for copper. The reasons cited include escalating construction costs, depressed prices, and the strong Australian dollar.

The slowing economic growth in China has had a negative impact on commodity prices, as China is the world's biggest importer and consumer of raw materials. Copper prices have dropped 25% in the last 18 months, and large amounts of capital expenditure do not make sense for BHP Billiton at this time. The company is wisely concentrating on less capital intensive projects as it waits for demand and prices to rebound. The company's liquidity position is satisfactory because, as Standard and Poor's points out, it has strong access to debt capital markets, flexibility in managing its capital expenditure, and an untouched revolving credit facility of $4 billion.


The sheer diversity of BHP Billiton means that it has some protection against downturns in any major business. The company is also financially solid and well managed. Any rebound in iron ore, copper, and natural gas prices will be a large increase in profit for BHP Billiton. I recommend buying BHP Billiton based on its high growth prospects, coupled with an attractive dividend yield of around 3.5%.

Disclosure: I am long BHP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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