BHP Billiton hits new seven-year low

The latest miner to slump to a multi-year low is BHP Billiton, hit by a UN report over the recent disaster in Brazil.

BHP Billiton
Source: Bloomberg

At some point, BHP and its compatriots in the sector may become good value. This point does not appear to have arrived yet. BHP, one of the giants of the mining world, is facing its own version of the Deepwater Horizon spill that still blights the outlook for BP.

The problem for bargain hunters in BHP shares is that they could be facing a value trap – it seems cheap, but due to deep-rooted factors it is actually likely to get cheaper. Admittedly, the mining sector is in a cyclical, rather than secular slump (ie one that will eventually end rather than go on for an extended period). Commodity demand will recover, but not for some time.

However, in recent years, BHP fell into the same trap as many other miners – it locked itself into overpaying for acquisitions and expanding capacity. Over the past three years, the decline in commodity prices has cost BHP around $29 billion. It also spent $17 billion to gain control of shale gas fields, with these assets now worth around $12 billion.

Most worryingly, the firm’s return on invested capital has been just 2.1% over the past year, versus a cost of capital of 7.4%. As commodity prices continue to decline, BHP is locked into a cycle of increasing production in order to maintain revenues – it must run faster and faster to stay in the same place.

With other miners having to look at their dividend, BHP’s 9% yield looks increasingly unsustainable. Free cash flow is, in the view of Société Générale unlikely to cover the dividend until at least 2018, and with net debt on the rise and credit rating downgrades looming it looks like a new (read: smaller) dividend will be unveiled in due course.

Like other dividend players in this market, one of the few attractions left for BHP is the payout, and with that gone, we could see a rapid acceleration of downside momentum.

Today’s decline has put the shares at their lowest level since November of 2008. The low of that month around £7.30 is the next natural level for real support to emerge, although some may materialise around the £8 mark (the lows of October 2008). In the short-term, the shares are likely to see resistance around £8.50 if a bounce does materialise, with a further upside target around £9.  

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Denne informasjonen er ikke utarbeidet i samsvar med regelverket for investeringsanalyser, så derfor er denne informasjonen ansett å være markedsføringsmateriale. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder. Se fullstendig disclaimer og kvartalsvis oppsummering.