Despite declining commodity prices in 2012, BHP Billiton (NYSE:BHP) management remains confident in its ability to capitalize on opportunities in the near term. BHP will reinvest $22 billion during its current fiscal year to expand upon its current operations -- the Escondida copper mine in Chile, the Gulf of Mexico oil fields, and the metallurgical coal division in Australia will resume full capacity production. Reinvesting in projects to bolster short-term and long-term prospects is management's core focus during this period.
BHP Billiton is not the only diversified mining firm that's feeling pressure from economic uncertainties in the US, China, and Europe. Both Rio Tinto (NYSE:RIO) and Vale (NYSE:VALE) are cautiously reviewing their respective near-term operations in order to compensate for the continuously declining demands for raw materials and metals since the 2009 recession. Current shareholders should hold BHP long term, while interested investors should consider 2012 as an opportune entry point to optimize capital appreciation and ROI.
Rio Tinto, Vale, Freeport-McMoRan Copper & Gold (NYSE:FCX), and Barrick Gold (NYSE:ABX) are the diversified mining firms that are most comparable to BHP Billiton. Both, BHP Billiton and Freeport-McMoRan trade for around 12.3 times earnings, while Rio Tinto's price is the highest at 22.9 times earnings. Barrick's price is around 9.5 times earnings, and Vale's price is around 5.9 times earnings. BHP Billiton's price is 2.6 times sales and 1.7 times its book value. Its current ratio is around 0.93, and its debt-to-equity ratio is around 0.43. Barrick Gold's 0.56 debt-to-equity ratio is the only one higher than BHP Billiton's.
BHP Billiton's $191 billion market cap and $70 share price are the highest among the aforementioned companies. BHP Billiton's annualized dividend is around $2.28 per share. Additionally, its $5.77 EPS is the highest among the firms. But its 32.4% EPS decline in 2012 and 19.1% projected EPS decline for 2013 are the worst among these mining firms. BHP Billiton's sales have increased 8.7% over the past five years -- this is also the lowest growth among the aforementioned firms.
BHP Billiton's 25.1% ROE is the highest among the firms. Its operating margin is around 32.8%, and its profit margin is around 21.5%. Its 0.56% float short is the lowest among the firms, while its 5.9 short ratio is the highest among its mining peers. BHP Billiton's beta is around 1.5, while its 2.5 million average trade volume is the lowest among the firms, and its relative volume is around 1.18. BHP Billiton's stock has increased around 4.9% YTD and about 2.6% over the past month.
Industrialization and urbanization in developing economies and emerging markets are expected to be the primary proponents for increasing demands for BHP Billiton's assets in the future. Focusing on fiscal and political stability in assets of interest will help management efficiently allocate capital within its current portfolio. BHP Billiton won't approve any new projects until mid-2013, and has already halted or reduced operations on projects valued over $50 billion. BHP Billiton's 2012 net profit totaled $15.42 billion, decreasing 35% from $23.65 billion in 2011.
In its first fiscal quarter, BHP Billiton saw iron ore production volumes total 39.8 million metric tons, increasing 1%, YOY. BHP intends to increase production in Western Australia 5% by fiscal year's end. BHP's first quarter metallurgical coal production totaled 8.9 million tons, decreasing 4%, YOY -- mainly due to closing a mine earlier in the year. First quarter copper production totaled 273,900 tons, increasing 24% YOY, mainly due to improving ore grades at its Chile asset. BHP's petroleum production totaled 61.25 mmboe, increasing 19%,YOY. This was mainly due to resuming operations in the Gulf of Mexico and increasing volumes from the U.S. shale acquisition.
BHP Billiton is also curtailing executive salaries in light of recent headwinds. Both the CEO and the chief executive of the petroleum division declined bonuses due to $2.84 billion in impairment charges BHP Billiton took from U.S. shale assets and declining prices. The CEO's total remuneration was $6.63 billion ending fiscal year 2012, declining 40% from the prior year. Freezing executive base salaries for the fiscal year and not adjusting remuneration for non-executive directors is a move the board made in an effort to more approximately align compensation with the performance of BHP Billiton's operating assets.
BHP is also making operational cuts in consideration of the declining growth rate of China's economy. China's GDP growth was originally projected to be around 8% for 2012. The World Bank and International Monetary Fund recently reduced the forecast to 7.8%. BHP employs 46,000 people worldwide, and 6,000 in its iron ore division. Currently, there are 900 open position in the iron ore segment. BHP recently announced it will reduce the number of redundant positions and reassign employees to mitigate extraneous costs.
Due to challenging market dynamics and declining commodity prices, BHP Billiton is unlikely to expand its coal division in Australia. Increased taxes, declining productivity, royalties, and a strong Australian dollar are all dissuading management from continuing to invest in expanding these coal operations at this current juncture. As demand for iron ore, coal, and copper in Asia and China have increased, labor and power costs for Australian mining firms have increased as well. The Australian dollar trading higher than the U.S. dollar through the majority of 2012, has made exports more expensive and less appealing to mining firms in this region.
BHP only plans to operate mines that generate capital and sustain profitability for the firm. Management certainly doesn't expect the next 10 years to reflect the record prices and demand the mining industry realized in this previous decade. Demand growth is expected to be more predictable, and moderately priced at sustainable levels. Iron ore and coal prices will realize downward pressure from moderate steal demands in China, while the country's transition into a consumer-based economy will increase demands for energy, aluminum, copper, and crop materials. Despite immediate headwinds surrounding uncertainties, there are plenty of indicators that support a long-term bullish outlook for BHP Billiton.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.