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Share tip of the week

Each week, our analysts put the spotlight on a company from our list of recommended shares to buy. As always, it's recommended as a medium/long term investment (approximately 18 to 36 months). This week's share tip of the week is...

BHP Billiton (BLT)

  CompanySectorCurrent price

 BHP Billiton (BLT)Mining 1308.00 c -2.93%   BalancedHigher Buy
 Analysis last updated on 24/02/17 at 1360pRecommended stop loss of 20%

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Company overview

BHP Billiton is the largest mining company in the world with a focus on five commodities: iron ore, coal, copper, petroleum and potash.

Our view

Under/over valued?
The mining sector is going through a tough few years as the overall global economy remains relatively weak. The rate demand for commodities from China slowed down at a time when mining companies were aggressively expanding capacity and production which led to the subsequent supply glut and fall in commodity prices. Big mining group's such as BHP Billiton suffered as a result, sales fell, huge asset write-offs were made along with enormous losses and dividend cuts.

This forced mining groups to aggressively cut back on large scale investment programmes, sell assets, drastically cut costs and focus on balance sheet repair. This has left the likes of BHP Billiton as far more streamline operations.

On top of this, we have seen a modest recovery in a broad range of commodities since the lows at the start of 2016. With all these dynamics coming together, BHP has reported encouraging numbers in recent trading updates. At the half year stage they have reported profits of $3.2bn versus a loss a year earlier of $5.7bn, net operating cash flows are up by 46%, the interim dividends jumped to 40c from 15c while the net debt has fallen by 23% to to$20bn.

The restructuring is taking BHP Billiton back in the right direction and we believe that the worst may be over for the commodities sector. We are therefore reinstating our Buy recommendation on the stock for investors seeking a balanced return and willing to accept a medium to high level of risk.

Bullish points

• Capital investment programmes have been curtailed to help manage the demand supply imbalances across many commodities. Meanwhile, projects already approved remain on schedule and within budget.

• Major efficiency gains have been made and a further $1.8 billion worth of efficiency gains are expected through to the end of 2017. Production in quite a few operations are expecting to see growth due to efficiency gains rather than new capital expenditure.

• With iron ore, they remain focussed on being a low cost producer. Average cost per tonne in their Western Australia operation has now fallen below US $20.

• Shale investments in North America were cut by 50%. Investors should not view this as lost production of shale gas, but as deferred production into the future when prices improve.

• They have adopted a 50% pay-out ratio for the dividend, this should help them ride through the volatile commodity cycle better

Bearish points

• The supply capacity has improved across a range of commodities possibly resulting in fewer commodity price spikes in the future.

• As the Chinese economy matures it is less likely to see the rapid economic growth it has already experienced in the past two decades. A lot of infrastructure will already be in place limiting future demand.

• There are high political risks associated with some of its operations along with natural disasters, accidents and industrial disputes.

• The company has faced hefty fines and compensation pay-outs for the Samarco damn accident in Brazil.

• The company's copper production has been impacted by ongoing industrial disputes in Chile.

Comment 22 February 2017

Author: Helal Miah, Investment Research Analyst

The facts

Below are the trailing 12 month results to the end of the Final period versus the previous 12 month trailing period. As we are reporting rolling returns below, the data will be different to that which you see on other parts of our web site. Results are as follows:


Basic Earnings per Share -81.0 pence

Dividend per Share 20.3 pence

Dividend Yield 1.8%

Revenue £24,791 million

Operating Profit/(Loss) -£3,436m

Debt to Equity 43.5%

Cash on the Balance Sheet £8,276m

Dividend Cover -4.0 times


Basic Earnings per Share 52.5 pence

Dividend per Share 99.5 pence

Revenue £35,798 million

Operating Profit/(Loss) £13,469m


Basic Earnings per Share -254.2%

Dividend per Share -79.6%

Revenue -30.8%

Operating Profit/(Loss) n/a%

Forecast Estimates 2018

Earnings per share 174.8 pence

P/E 14.5x

Dividend yield 4.0%

Month(s) Company is expected to go Ex-Dividend



View our previous recommendations

Please read our investment research policy to understand how our analysts reach their recommendations.

Valued using at least 15 minute delayed prices (where available)