3 Reasons BHP Billiton Ltd Stock Could Rise

BHP Billiton (NYSE: BHP  ) provides the basic materials that are needed for economic development. That positions it to prosper alongside the global recovery, and it's taking the steps needed to ensure that it gets a bigger piece of that demand going forward.

While China's growth was soaking up immense quantities of natural resources, miners went on an expansion spree. BHP was no different; it, too, started expanding for the sake of expansion alone. While demand was high, that business model made complete sense, but China has begun to slow down and fellow emerging giant India has yet to really hit its stride. Meanwhile, largely lethargic economic recoveries from the deep 2007 to 2009 recession have left demand soft in developed markets.

So, supply has been exceeding demand, which itself had begun to soften. That's not to say that demand is falling — overall it isn't. Just that, generally speaking, in the mining industry, there's too much raw material available, so prices are low. That has taken industrywide performance and share prices along with it.

(Source: Paris 16, via Wikimedia Commons)

Better focused
But BHP isn't sitting still in this environment. It has refocused itself around core businesses in iron ore, copper, oil, and coal. And the results of refocusing on a smaller number of sectors has been compelling. In fiscal 2014 BHP increased production by 9%. It achieved record production at 12 of its operations, with overall iron ore and oil production hitting all-time highs.

Although producing and selling more when prices are struggling may seem like a mixed blessing, it actually has notable long-term benefits. For example, as higher cost production falls off, BHP will be able to gain market share. Thus, when prices start to recover, the company will benefit not only from increasing prices but also from a larger piece of the pie. Essentially, BHP is getting better by doing less.

Money to spare
In order to better focus on its core operations, BHP has been shedding non-core assets. For example, over the last two years, BHP has sold over $6.7 billion worth of businesses. While investors have had to suffer through notable write-offs along the way for what, in hindsight, turned out to be bad investments, most of the heavy lifting has already been done.

So future write-offs should be smaller, and that cash can be put to good use at BHP. That includes everything from paying down debt to funding new investments. Those new investments, meanwhile, have returns exceeding 20%, which makes new projects highly profitable.

There's no doubt that the company's transition has been hard on investors. Indeed, the stock is still well off its 2011 highs, but BHP's new focus has left it in a strong position to grow again, and with relatively low-risk, high-return projects.

BHP Chart

BHP data by YCharts

The little things
Increasing production and refocusing the business are big picture issues. That's not the only place where BHP is getting better. It's also focused on the small things. For example, in the first half of fiscal 2014, BHP highlighted that it had increased the utilization of its truck fleet by 8% and its digging fleet by 10%. And it believes these are sustainable improvements.

It might be hard to envision what this means, but trust me it's big. Imagine doing the same amount of work and getting paid 8% to 10% more for it. Sounds pretty good, right? That's essentially what BHP has managed. BHP has also improved its performance in the oil and gas space, which operates differently than mining, cutting drill time by 17%. BHP has proven it can do the little things right to support the big picture changes it's making.

The basis for future share price gains
These are the underpinnings of BHP's future, getting better (on a big and small scale) at fewer things. Once commodity prices start to cooperate, BHP's results should respond quickly. And that should lead to a significantly higher share price. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3076615, ~/Articles/ArticleHandler.aspx, 11/22/2014 5:38:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement