BHP Billiton is master of its own destiny
by Fat Prophets
Whilst it is inevitable that the flow of negative economic and corporate news that underpinned the volatility will continue this year, we believe that much of this bad news has already been factored into share price of mining giant BHP Billiton (LSE, BLT).
As many get distracted by the short term noise, we are always looking at the bigger picture. With this in mind we remain strong supporters of the ongoing secular bull market in commodities and whilst BHP remains the best-placed of all the resource sector heavyweights, it too is facing its near-term challenges.
One of these challenges will be this year’s iron ore contract price negotiations. The Chinese are looking for a 40 percent cut in contract prices, which would take prices back to 2007/08 levels.
Nevertheless, BHP will still continue to generate attractive returns even at these levels. Moreover, we do not believe the fall from last year’s peak prices in the commodity sector is indicative of a sustained change in trend over the longer-term.
There are already tentative signs that demand for steel (and therefore iron ore) is lifting. The various infrastructure spending based stimulus packages will provide further support to this. We therefore view 2009 as likely to be a consolidation period for commodity prices, rather than a continuation of downward momentum.
That’s not to say of course that there is substantial pain being felt in the resources sector. Indeed, many projects are uneconomic at current prices, leading to production development cutbacks. The current commodity price weakness is sowing the seeds of future price strength.
The companies best placed to capitalise on this will be those that are able to maintain their development in the interim and expand their industry footprint. Companies that fall into this category will broadly speaking not be weighed down by excessive debt and enjoy the flexibility of a diversified production base.
Indeed, with a comfortable net debt to equity ratio of 21.6 percent at June 30 2008, BHP is master of its own destiny rather than having to dance to the tune of lenders. The company is therefore able to expand their future production profile by taking advantage of distressed asset sales which could even prove a more attractive option than pursuing existing development projects.