BHP BILLITON LTD. ADRs $72(New York symbol BHP; Conservative Growth Portfolio, Resources sector; ADRs outstanding: 1.6 billion; Market cap: $115.2 billion; Price-to-sales ratio: 2.9; Dividend yield: 3.3%; TSINetwork Rating: Average; www. bhpbilliton.com) is the world’s largest mining company, with major operations in Australia, South Africa, the U.S. and the U.K.
BHP’s main products include iron ore (31% of revenue; 43% of earnings), oil and potash (20%; 32%), copper (18%; 16%), coal (17%; 6%), and aluminum, manganese and nickel (14%; 3%). BHP cuts its risk by focusing on projects with high-quality, long-lasting reserves.
Oil and gas expansion spurred results
BHP’s revenue jumped 43.8%, from $50.2 billion in 2009 to $72.2 billion in 2012 (BHP’s fiscal year ends June 30). That’s partly because it expanded its oil and gas business in 2011 through two major purchases: it paid $12.0 billion for Petrohawk Energy, which produces oil and natural gas in Texas and Louisiana, and $4.75 billion for shale gas properties in Arkansas. However, lower coal and iron ore prices cut revenue to $66.0 billion in 2013.
Thanks to the new operations, earnings rose from $2.11 per ADR (or a total of $5.9 billion) in 2009 to $8.54 per ADR (or $23.6 billion) in 2011. (Each ADR represents two BHP common shares.) Earnings then fell to $4.07 per ADR (or $10.9 billion) in 2013.
As part of a long-term strategy to simplify its operations, BHP is selling some of its less-important properties. It raised $2.2 billion from asset sales in the six months ended December 31, 2013.
The cash will help BHP pay for its more-promising developments. For example, it recently opened its 85%-owned Jimblebar iron ore mine in Australia. This project’s high-grade ore requires less processing than other grades, which should give it an edge as steelmakers in China cut their air pollution.
Low costs help new mine compete
Meanwhile, BHP is moving ahead with its $3.8- billion Jansen potash mine in Saskatchewan, even though potash prices fell sharply in response to last year’s breakup of a major marketing alliance between producers in Russia and Belarus.
BHP feels Jansen’s huge reserves (which would last 50 years) and low operating costs still make it economically viable. The project is 30% complete and could start up in 2020.
The company expects to spend $16.1 billion on exploration and development in fiscal 2014, down 25.8% from $21.7 billion in 2013.
BHP can comfortably afford these outlays. As of December 31, 2013, its long-term debt was $31.7 billion, or a manageable 28% of its market cap. It also held cash of $10.9 billion, or $6.82 per ADR.
More to come after 94.6% gain
We first recommended BHP at $37 in our March 2009 issue. It rose as high as $102 in April 2011, but has fallen to its current price on concern about slowing Chinese growth. The stock trades at an attractive 13.6 times the $5.29 per ADR that BHP likely earned in fiscal 2014. The $2.36 dividend yields 3.3%.
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