On Aug 29, 2013, we upgraded our recommendation on
BHP Billiton Limited
) to Neutral from Underperform, based on the company's future
Why the Upgrade?
We see improved future prospects for the company on the back
of ongoing industrialization in China, India and other developing
economies. BHP Billiton has a competitive advantage based on its
diversified portfolio of low-cost and high-quality assets. This
may help the company derive profits from industrial and
infrastructural transition across the world. The company is also
in the process of trimming its product portfolio to focus more on
the competitive ones.
BHP Billiton has been reducing its costs to maintain its
margins as well as profits, in the falling commodity prices
scenario. In fiscal 2013, the company reduced its controllable
cash costs by $2.9 billion year over year. The company plans to
reduce its costs further in fiscal 2014, thereby increasing
However, it can not be negated that BHP Billiton has been
badly affected by a reduction in the prices of most of its
commodities. Average selling prices of iron ore and coking coal
declined 17% and 34%, respectively, year over year in fiscal
2013. Moreover, the risks associated with mining and exploration
activities, like mining disruptions, also make us cautious.
Additionally, BHP Billiton faces industry-wide pressure from
equipment shortages, labor crises and volatile metal and mineral
prices. Also, depleting natural resources call for an improvement
in ore grade and subsequent search for new mines. This is
expected to raise exploration and development costs as well.
To sum up, BHP Billiton had roughly 19 projects in the
research and exploration stage exiting the fiscal 2013, most of
which are expected to start production before the end of fiscal
2015. We expect to see a meaningful contribution to the company's
results from these projects.
Other Stocks to Consider
BHP Billiton currently carries a Zacks Rank #3 (Hold). Other
stocks worth a watch in the mining industry are
Avalon Rare Metals Inc.
Denison Mines Corp.
US Energy Corp.
). All these stocks carry a Zacks Rank #2 (Buy).
AVALON RARE MTL (AVL): Free Stock Analysis
BHP BILLITN LTD (BHP): Free Stock Analysis
DENISON MINES (DNN): Free Stock Analysis
US ENERGY CP-WY (USEG): Free Stock Analysis
To read this article on Zacks.com click here.