BHP Billiton: Should You Buy the Rally?

BHP Billiton (BHP) has rallied strongly since hitting its year to date lows in January. However, investors shouldn’t be tempted by BHP Billiton’s recent rally as it could soon reverse its course. Besides, there are many other stocks in the energy and mining sector that have performed a lot better than BHP Billiton and can continue doing so. Given the headwinds that BHP Billiton faces, I wouldn’t bet on the company’s rally to continue and would advise investors to book profits.

More problems ahead

With time, it was becoming difficult for BHP Billiton to maintain its dividends mainly due to the drop in iron ore costs.
Recently, the company has reduced its short-term dividend by 74 percent as well as also clashed its progressive dividend policy. It is highly likely that seaborne iron ore market will continue to face problems, therefore, the company has taken a smart decision to cut down its dividend.

A few weeks ago, BHP Billiton shared its financial results for the first quarter of FY16. In the blustery market environment, the company produced net operating cash flows of $5.3 billion and somehow managed to generate positive free cash flow. BHP Billiton also detailed 40 percent EBITDA margin, which is considerably greater than the company’s closest rivals.

The EBITDA margin is definitely remarkable keeping in mind the frail pricing condition and once again throws light on the fact that leading iron ore miners, which comprise Vale and Rio Tinto apart from BHP Billiton, have truncated unit costs and can endure even the weak price environment.

The company also maintained robust balance sheet, holding net debt almost steady during the prior one year, regardless of considerably scrawnier prices and substantial dividend payments. Apart from this, the company has started a new dividend policy grounded on a payout ratio, which will aid both the long-term value foundation and balance sheet.

As per CISA, steel producers in China writhed around $6 billion in losses in the starting ten-month previous year. According to the Market Realist, northern Hebei province has decided to reduce steel output by 8 million tons in 2016.

Considering the prevailing situation, the stance for iron ore still appears miserable. The company anticipates costs to stay low. Iron ore accounts for a major portion of BHP’s entire revenue and EBITDA. Bearing in mind the challenging viewpoint, BHP Billiton will face some troubles moving forward. However, lesser costs will support the company in producing exciting value for stockholders in the long run.

Conclusion

For investors who want to play the rally in energy and mining stocks, I believe there are many other better options than BHP Billiton. However, due to the recent upsurge, I think investors should book profits and sell the rally.
Published on Apr 19, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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