BHP Billiton (BHP 0.22%) has expanded aggressively to meet global demand for natural resources, driven by China's seemingly unstoppable growth over the last decade. Only China's growth has now begun to slow, taking global raw material prices down with it. In this new environment, BHP Billiton has been getting leaner and meaner, and is increasingly looking like a good long-term bet on global growth—from China and beyond.
A big shift
During mining equipment supplier Joy Global's (JOY) fourth quarter conference call, Edward Doheny, who is now the company's CEO, summed up the shift that's taken place in the mining industry: "In the last 24 months, we've seen over 25 new CEOs at mining companies take over with a focus on cost reduction and returns to shareholders after years of focus on growth and investment."
Growth had been the focus, because China's gross domestic product was growing at a double-digit clip. That pace demanded vast amounts of natural resources to support the construction of everything from homes to cars. However, growth has since slipped and is projected to keep heading lower, with the World Bank projecting 7.4% GDP growth in 2016. While that's huge compared to the projected U.S. growth rate of 3% that year, it's a far cry from the 10% plus rate that drove demand growth, and investment, in the mining industry.
So there's a good reason why BHP Billiton's shares have fallen roughly 30% from their recent highs of $100 a share or so: The prices for the commodities BHP sells have been falling as China's economy slows and, with them, BHP's financial performance. Like most miners, BHP has been retrenching.
Changing with the times
For example, Joy Global noted a 40% reduction in capital spending in 2013 across the mining industries it served. BHP trimmed its capital budget by roughly a third in fiscal 2014, a fact that was announced by the company's new CEO, Andrew Mackenzie, who took the reins in May 2013.
And another important bullet point from the fiscal 2014 slide deck? "We will remain internally focused and return excess cash in a consistent manner." In other words, the company is focusing on shareholder returns. That helps explain the recent examination of a spinoff of underperforming assets as the company looks to focus around iron ore, copper, metallurgical coal, and oil. Some are calling it an unwinding of the merger between BHP and Billiton that created the seemingly unwieldy giant.
That said, the miner hasn't given up on spending or growth. It's simply being more careful. For example, it's been using technology to improve its cost structure. A good example is automated trucks, which increased truck utilization by 10%. So even as production increased 9% across the company in fiscal 2014, costs have been heading lower in key businesses. For example, copper costs fell 6% and iron ore 12%.
BHP is getting better at what it does and is shifting away from less desirable businesses. And, it's important to remember that China's growth hasn't stopped -- it's just slowing. So there's still demand for the commodities that BHP sells, but it's being outstripped by supply. Eventually the highest cost miners will close up, leaving companies like BHP to benefit from the eventual commodity price recovery.
It's also worth noting that the World Bank expects fellow global giant India's GDP growth rate to accelerate from 4.5% in 2012 to 6.6% in 2016. That would go a long way toward supporting commodity demand and prices even as China continues to slow (from 7.7% to 7.4% over the same span).
Meanwhile, BHP's P/E is roughly 12.5, near the low end of its range over the past decade and below its five year average of around 16. BHP's yield, meanwhile, is a generous 3.3% or so, nearly a full percentage point above its five-year average of 2.6%. With a strengthening core business and global growth set to slowly work off excess commodity capacity, BHP should be a solid option for long-term investors at recent prices.
