The mining sector has been slammed by the global slowdown and falling commodity prices, and BHP Billiton (NYSE:BHP) hasn't been spared. Still, if investors are willing to look past some expected short-term pain, Barron's Alex Wilson writes that BHP is the best long-term bet amongst mining companies.
The world's largest miner, BHP is uniquely placed to survive a long downturn thanks to balance-sheet strength and boasts a diversified global portfolio of long-life, low-cost, high-grade assets. The company has scored points with many investors and analysts for abandoning its year-long hostile bid for rival Rio Tinto (RTP), a deal which would have brought BHP's debt-to-equity ratio to nearly 50% from 13% at the time. BHP's debt-to-equity ratio has since fallen to 9.5%, leaving the company in a strong position to go bargain-hunting for assets in a depressed market.
Investors should bear in mind that some short-term pain is expected. For one thing, the company will likely face sharp price drops in H2. To cut costs, BHP has announced 6,000 job cuts, will shut a $2.1B nickel mine in Australia, and will pare back coking-coal production.
In Australia, BHP trades around A$32, and analysts see over a 10% upside over the next year. (The NYSE-traded ADR is trading around $45.)
- John Sevior, of Perpetual Asset Management: "If you want to hold one mining stock, BHP would be it."
- Warwick Cumming, a fund manager at Tyndall, says BHP is better-placed than its peers and attractively priced for long-term investment.
- BHP Billiton: FH1 profit fell 57% to $2.62B, well short of the $4.4B analyst consensus. EPS fell 56% to $0.47. Attributable profit before exceptional items of $6.1B, short of $6.9B consensus. Impairment charge of $3.36B on Ravensthorpe nickel operation. Revenue +16.6% to $29.78B. (PR)
- The one-off cost of slashing 6% of its global workforce, shuttering an Australian nickel mine, and cutting coal production will come in at $500M. "Our biggest concern is not China, which alone is 30% of global consumption," CFO Alex Vanselow said.
- BHP abandoned its year-old hostile bid for Rio Tinto on turmoil from the global market. BHP execs said the deal would raise BHP's debt, make asset sales difficult and was no longer in shareholders' interests.