We have upgraded our recommendation on
BHP Billiton Limited
(
BHP
) from Underperform to Neutral.
We believe that thelong-term structural drivers of
industrialization and urbanization in the developing world will
remain intact. Hence, optimism for general commodities demand based
on worldwide industrial and infrastructural progress will continue
to post financial gains for the company, going forward. In this
likely scenario, BHP,a uniquely diversified resources company, is
well positioned to take advantage of the economic transition.
Moreover, BHP Billiton has been adding momentum to its approved
pipeline of high-return growth projects, diversified across
commodity, geography and customers. Prioritizing investment
focusing on large, long life, low cost, expandable and upstream
assets continue to reinvigorate our growth outlook. Besides,
investments in energy coal and petroleum expansion also look
impressive.
However, the company isclearly not immune to industry-wide cost
pressures. While equipment shortages are challenging the industry,
labor crisis remains critical too. Metal product prices remain
volatile reflecting a general swing in market sentiment. Besides,
worldwide mining cost inflation, governmental delays, depleting
natural resources as well as high-cost competitorsfurther increase
the company's operational costs. In addition, margin compression
for nickel, aluminum and manganese alloys over the last few
quarters has remained as a matter of nagging concern for BHP.
A substantial increase in higher grade ore copper production at
Escondida, strong production from Queensland Coal and drilling
development at non-operated Gulf of Mexico facilities are
anticipated to deliver high margin production for miners. including
BHP. However, such an attempt to improve the quality of ore grades,
in order to stay competitive, leads to higher expenses for the
company. Moreover, BHP faces execution risk from natural calamities
like tropical cyclones, severe monsoon, or flooding, which
potentially disrupts mining operations. An upsurge in oil prices
and rising core inflation in the emerging markets add to the
blow.
We are concerned about a slower global growth rate, fallout of a
fluctuating U.S. as well as worldwide economy. These may impact the
demand for the company's products, dampening revenue growth, going
forward. Moreover, the metals and minerals market remains highly
competitive, especially in the European and Asian countries, in
addition to other overseas markets, based on price, quality, range
of products, reliability, and transportation costs.
Hope survives as we foresee BHP Billiton's extensive growth
program within which six project hubs are already fully
operational, delivering career opportunity to skilled personnel.
The company's centralized procurement of key input components
reduces its exposure to tight consumable and mining equipment
markets. Mention may be made of long-term partnerships with
suppliers, who ensure certainty of access to raw materials.
BHP's strategic acquisitions as well as extensive organic growth
program across geographies are also expected to generate positive
business under all market conditions. However, such divergence
exposes it to the risk of fluctuations in foreign exchange rates,
which may have a significant impact on the company's financial
results going ahead.
BHP Billiton is one of the world's largest diversified resource
companies operating in mineral exploration, production and
processing, oil and gas exploration and development, and steel
production and merchandising. The company competes directly with
its peers, such as
Alcoa Inc
(
AA
),
Vale S.A
(
VALE
) and remains positive on the outlook for an improving global
economy driven by urbanization and industrialization, in the future
ahead.
ALCOA INC (
AA
): Free Stock Analysis Report
BHP BILLITN LTD (
BHP
): Free Stock Analysis Report
VALE SA (
VALE
): Free Stock Analysis Report
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