BHP Billiton (BHP), the Australian commodities major with a presence in several verticals, such as mining, production, process and development, is hitting a few troughs in the US stock market. In the past week, BHP has been under tremendous pressure - from natural forces (heavy rainfall) and striking employees to a national trade deficit - that have led to falling stock price.
In fact, the end of last month saw BlackRock World Mining Fund (a major investor in BHP) announcing a major cut in its investments in BHP from an earlier 10% to 6.5% . The reasons for the pullback: BHP's ongoing troubles will affect long term performance of the company. Besides, BlackRock is heavily invested in Rio Tinto (RIO), BHP's closest competitor.
Rio Tinto is a multi-national mining company with offices in Australia, but with an operating base in the UK and works the complete vertical from exploration to development and production. It is composed of nearly a dozen and more production types, which buffers it from typical risks of fall in commodity prices, waning buyer interest to the vagaries of market behaviors. The diversification has helped Rio Tinto to retain the upper hand against BHP in current markets.
BHP, however, continues to suffer further setbacks. As of Thursday last week, the Australian government's District President of Construction, Forestry, Mining and Energy Union (CFMEU), Stephen Smyth, announced that,"We're looking at next Thursday's night shift to start the stoppage through to Saturday day shift at all seven mines." (Reuters)
This follows a week long strike by over 3,500 of the total 10,000 employees demanding better working conditions, through CFMEU offices, which failed to negotiate better working conditions for its members. At the start of last week, BHP had already declared force majeure a legal option that cocoons it, from the implications of falling short on supply obligations, due to 'circumstances that are beyond its control.'Heavy rains compounded by labor issues have continuously affected production at metallurgical coal mines at Bowen Basin, Australia.
Politically also, the large miners in Australia have had a running battle with the government in taxes (read carbon) and the Australian Government's perception of wealth sharing. The merger with Rio is still work in progress. BHP has not been able to flex its huge structure quickly enough to react to changes within the economy. The abundant availability of gas has led to a lot of major players looking at gas as a potential source of energy away from coal.
For analysts such as BlackRock, BHP's acquisition of a large number of US shale gas operations has worked against the Australian Goliath. Considering the sharp fall in US natural gas prices (nearly 50% over the past nine months) BlackRock's stand is totally agreeable. Investors in BHP will share my opinion that this stock is unlikely to yield benefits in the next three years.
The aftermath of the rains has resulted in an extended period of on-site maintenance work and the ore production has fallen. In addition to this the prolonged industrial action by the workmen has been a problem for BHP.
Hence, investors are looking for answers from BHP. Perhaps, directions of its investments and how the downfall will be streamed will help in answering investor concerns. Unless we are confident that massive sums of caps being invested will not return low yields, maybe it would be best advised to maintain a wider-spread out than a single-large bloc of BHP stocks.
Again, there is one question that continues to play on the mind when considering the BHP's current status: How will BHP sustain its heavy investments in both the Olympic Dam (where copper and gold are mined in South Australia) as well as Pilbara for iron ore.
The answer lies in BHP's monolith DNA: it has diversified interests globally. Even as it competes intensely with other companies such as Vale (VAL) and Rio Tinto. Rio has a better track-record as suggested by many analysts, as its holds are wide-spread, and is not tied down to a single industry. But BHP's will prove a winner with long-term gains, likely over the next three years, when its new ventures, begin to break even.
The continuing push towards replacing coal as an energy source will lead BHP to look at Less Regulated Countries (LRC) as market for coal. At the moment, China is leading the consumption pattern. However, the Chinese construction market and the huge impact that China has on the commodity resources leads to the thought that BHP would want to have spread of its markets. Traditionally BHP has been competing with Vale for the South American market and we will probably see a lot of this if China slows down.
In terms of diversification, BHP is better placed than either Vale or Rio. The iron ore production is 25% (Rio 41%, Vale 71%); Base metals 25% (Rio 24%, Vale 16%), Petroleum 28%, Coals 15%, Manganese 3%. Therefore, in case of a downturn in any one sector or commodity, it is probable that BHP might be able to spread its losses better when compared to the competition.
Resource stocks should be retained and investors should not be tempted to sell early. BHP prices fell last month largely due to China's lowering consumption rates. Since there was a fall in export of coking coal by 44% and 24% of thermal coal, trading volumes were affected by nearly 24%. This led to a fall in BHP stock prices by 1.25%.
With predictions of China's growth rate falling to 7%, BHP's exports may be affected, but is expected to stabilize quickly. The Australian Reserve Bank is expected to bolster the mining sector with an interest cut around May; though rates were on hold in the first week of April at 4.25%.
Bottomline is to retain both the Australian resources - BHP Billiton as well as Rio Tinto stock, despite the weak Australian trade deficits, inclement weather, and striking employees pulling this Goliath in different directions. Growth is spread thin right now, but in the long term, BHP will prove to be an outstanding stock to own.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.