2015 has been an annus horribilis for commodities across the board. Leading the rout has been the poor performance of the Shanghai stock market which saw trillions of dollars wiped out in Q2 and Q3 2015. The poor performance of Chinese equities continues to be a thorn in the side of global commodities like copper, gold, agricultural produce et al. Allied with that is the oversupply of crude oil on the global markets, coupled with weak demand. This has led to multi-year lows in the price of Brent crude oil and WTI crude oil, with many oil producers now facing serious profitability concerns. Some of the biggest mining and commodities companies that have been heavily impacted by ongoing commodity price weakness include Rio Tinto Ltd. (RIO, Financial), Vale S.A. (VALE, Financial), Alcoa Inc. (AA, Financial) and Anglo-American. Lower prices mean reduced revenues, layoffs, decreased share prices and contraction of economic activity. This analysis will be investigating one of the largest Anglo-Australian commodities giants – BHP Billiton Ltd. (BHP, Financial).
BHP Billiton Ltd technical performance data
As the world's biggest multinational energy and commodities company, BHP Billiton Ltd. sets the tone for other companies in the industry. The company’s CEO is Andrew McKenzie, and it is headquartered in Melbourne, Victoria as well as London, England. The repercussions of plunging commodities prices have hurt this company's stock price over the past year. The 52-week high for BHP Billiton Ltd. is $72.76 and the 52-week low is $35.79. At its current share price, BHP Billiton Ltd. is trading at $38.99 per share – 8.9% above its one year low price. The company currently has a market capitalisation of $103.65 billion with a price-earnings ratio of 10.41. BHP Billiton stock has been outperformed by the S&P 500 by over 17%. It is interesting to point out that the company’s stock price over the last 52 weeks has declined by 44.86% while that of the S&P 500 over the same period has increased by 9.96%. The stock’s 50-day moving average is around $40.02 and it has a 200-day moving average of approximately $45.83.
This points to a clear downward trend in share prices, and baring increased demand and improved performance on a global scale, the trend is likely to continue. Approximately 1 percent of BHP Billiton shares – float – are short sold. The company’s short interest stands at approximately 13.2 million shares – a 5% reduction from the same period one month ago. Since the company's primary business lines include petroleum exploration, refining and production, mineral exploration (coal, gold, iron ore, nickel and copper) it has come in for some serious tap in recent months. The company's fiscal year ended on June 30, 2015 and its profit margin was reported at 15.81%, with an operating margin of 28.5%. The company's revenues totalled $63.18 billion with revenue per share of 23.75. However there was negative quarterly revenue growth year on year of -11.90%.
What the experts are saying about BHP Billiton Ltd.
On a scale of 1.0 to 5.0, with 1.0 being a strong buy a 5.0 being a strong sell, BHP Billiton Ltd. is rated at 3.0. While the one-year price target is approximately $49, there is a great deal of residual concern that weakness in the commodities markets will continue well into the future. However, very few analysts have taken a hard position on selling the stock, because the fundamentals of the company and the industry are sound. In fact analysts including Investec (IAP, Financial), Societe Generale (SGBJ, Financial), Credit Suisse (CS, Financial), Citigroup (C, Financial) and Liberum have all upgraded their expectations for this company’s stock. And much the same pattern is seen with analysts across the board, with the majority opinion being either buy or hold, with a minority of analysts opting for the sell rating.
On a positive note for BHP Billiton, the ongoing U.S. dollar's strength against currencies like the Australian dollar and the euro is helping to reduce production and operating costs for all of the biggest iron ore producers such as BHP Billiton. This will start to have strong positive effects on the bottom line of the company which will help to boost share prices. The current exchange rate for AUD $1 is USD $0.73, meaning that costs denominated in Australian dollars are markedly less on global markets in U.S. dollars.
A sliver of hope on the horizon for mining stocks
On July 10, Citigroup opted for a buy rating from a neutral rating, at which time the stock closed at a price of $39.47 per share. On June 15, multinational banking conglomerate, HSBC also upgraded its rating on BHP Billiton Ltd. to a hold from a reduced rating. It should be remembered that, while the stock is trading some 8.9% above its 52-week low, it is also trading over 46% below its 52-week high. The company's price earnings ratio is also substantially less than the basic materials sector average range of 21.03, coming in at 10.41. This is likely due to the heavily reduced price of the stock.
However it's not all doom and gloom for holders of mining stocks, since a recent upgrade by the boutique investment bank – Liberum Capital –Â helped to shore up the share price of Rio Tinto, Glencore and BHP Billiton in the UK. BHP Billiton Ltd as a multinational conglomerate is heavily invested in commodities, and the price of copper continues to weigh heavily on share prices. The mining sector has already absorbed sharp losses with respect to iron ore, and it is likely that the continuing weakness in copper will lead to a reduction of supply in the metal. According to analysts reporting to the Financial Times, the latest consensus forecast among experts is that the stock is considered a hold. This is a downward revision from the prior consensus forecast in December 2014 when it was perceived that BHP Billiton would outperform the market.
Bottom line: Go with the experts on this one – BHP Billiton Ltd. is a hold and if prices retrace, buying opportunities may become favorable. There is tremendous upside potential at current prices for the majority of fundamentally sound mining stocks, but caution is the order of the day since the rout is not over yet.
