A Strong Long-Term Growth Pick
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
BHP Billiton Limited (NYSE: BHP) is one of the world's largest producers of prominent commodities such as iron ore, nickel, aluminum, copper, coal, manganese, and silver, as well as oil and gas. BHP is now divesting many of these mines which do not have bright growth prospects.
Clear Strategic View
Back on September 7, BHP announced that it had sold off a 37% equity stake in Richards Bay Minerals located in South Africa, to Rio Tinto (NYSE: RIO) for about $2 billion. Through this move the company intends to focus on its larger projects and make its operating activities portfolio simpler as well as more efficient.
Furthermore, BHP is currently busy reallocating assets to focus on high margin businesses, which means that it will be deleting aluminum from its financial statements, while shifting its focus on coking coal and iron ore products for China's steel output. This divestment is a result of slowdown in the global market prices of commodities, the major contributor of this slowdown being the declining demand in China.
BHP wants to capitalize on the growing Chinese market where it holds a huge 80% of the total market share. In addition, BHP also expects an estimated 8% growth in the Chinese market in the next ten years, based on the expected growth in steel demand to 1 billion tonnes from 700 million tonnes per year.
Consistent growth in assets
The Pinto Valley copper mine, which is situated in the Miami area of Gila County, Arizona, hasn't been in operation since 2009 due to the global economic crisis. Although the company did consider restarting the operations of this mine with an annual production capacity of 60,000 metric tonnes, with an investment of about $200 million, things kept going wrong. For instance, a fatal injury to a contractor at the site, and now an investigation. Finally, the company announced they would sell this mine. This project wasn't adding much value to BHP's portfolio anyway, so by selling this resource, BHP can now focus on bigger and better projects.
Escondida, the world's largest copper mine located in Chile, whose major stake is owned by BHP Billiton, has shown excellent results in terms of output this year. The output has consistently increased nearly every month for this year. This year this mine has produced 366,205 tonnes of copper concentrate, along with 167,037 tonnes of copper cathodes. This mine alone extracts about 7% of the world's total copper production. This year, the company's copper production in the second quarter in June was 312,500 tonnes, a 15% rise from the same quarter last year.
BHP Billiton along with Rio Tinto has approved a $4.5 billion integration plan for Escondida plant to increase its output to 1.3 million tonnes annually by June 2015.
Fundamentals backed by good technicals
BHP's stock price from August till current date has risen by about 8%, from $65.80 to $70.93. With a price to earnings multiple of 12.3 times, BHP appears clearly to be superior to many of its competitors such as Silver Wheaton (NYSE: SLW) at about 25 times, Rio Tinto at about 23 times, Freeport-McMoRan (NYSE: FCX) at about 13 times and Goldcorp (NYSE: GG) at about 23 times.
Furthermore, with a dividend payout ratio of 38%, BHP clearly outperforms its peers such as Goldcorp with 29%, Silver Wheaton with 19%, Barrick Gold (ABX) with 15%. Compared to most of its competitors, BHP has the best cash generating ability. With $24.4 billion of operating cash flows, BHP clearly beats out peers such as Vale (VALE) with about $20 billion, Barrick Gold with about $5 billion, Freeport with about $3 billion, and Rio Tinto with about $15 billion.
BHP is a far safer growth prospect with lower debt, leading to substantially higher growth ability, levered free cash flow, which is about $4 billion that beats out rivals such as Rio Tinto with about $300 million, Freeport-McMoRan with about $630 million, Silver Wheaton with $312 million. Still, others have negative levered free cash flow such as Goldcorp with -$228 million, Vale with -$4 billion and Barrick with -$840 million.
Overall, BHP looks great with reliable cash flows and income generation. With 25% return on equity, it is clearly the highest paying stock among peers such as Rio Tinto at 7%, Freeport-McMoRan at 20%, Barrick Gold at 13%, Silver Wheaton at 21%, Goldcorp at 7.5%, and Vale with about 15%. Ongoing strategic measures should ensure the company continues to provide value as well as long-term growth.
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