BHP Languishes Amid Declining Commodity Prices
07/18/2012| 08:46pm US/Eastern
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MELBOURNE-Solid yearly production figures weren't enough to halt a further sell-down Wednesday in BHP Billiton Ltd. (>> BHP Billiton Limited) shares to their lowest point in more than three years, as investors continue to worry about falling commodity prices.
The world's biggest mining company by market value reported producing a record 159.5 million tons of iron ore for the financial year ended June 30, 19% more than a year earlier, and forecast a 5% increase this year as it chases rivals such as Rio Tinto Ltd. (>> Rio Tinto Limited) in expanding production capacity in Australia. Iron ore is the main driver of BHP's earnings, but its output of coal, petroleum and other commodities also rose.
The problem for Chief Executive Marius Kloppers is weakening demand, with China's economic slowdown coming even as the U.S. recovery loses steam and Europe's debt crisis drags on. Iron-ore prices have fallen to eight-month lows of about US$130 a metric ton, after peaking above US$180 a ton last year.
That downturn is spooking mining-company investors. BHP's stock traded in Sydney, down about 36% over the past year, is on the brink of falling below 30 Australian dollars (US$31) a share for first time since 2009. Rio Tinto's Sydney shares are at a three-year-low of their own. (Both companies also have shares that trade in London.)
Fidelity's Global Equity Fund sold its shares in BHP in February and is still out. BlackRock Inc., a major investor in most big mining companies, declined to comment on specific stocks, but in March a director said that while the firm hadn't reduced its BHP stake, BHP's weighting in BlackRock's World Mining Fund had steadily decreased since 2009.
Downgrading BHP to neutral last week, Credit Suisse warned that annual capital expenditure above US$20 billion--its forecast for the foreseeable future--means meaningful share buybacks and significantly higher dividends are off the agenda for some time.
BHP executives have backed away from the company's earlier investment target of more than US$80 billion for the five years to the end of financial 2015, saying that only projects offering a decent return on investment will proceed. BHP's strategy is to own large, long-life, low-cost operations in key mining hot spots around the world.
A spokeswoman for BHP declined to comment on its share price, its projects or the potential for share buybacks.
"The vast majority of the earnings growth in BHP and the resources sector has come from the gains in [commodity] prices and not from organic growth," said Neil Boyd-Clark, a Sydney-based portfolio manager at Arnhem Investment Management, which owns BHP stock. "What organic growth there has been in iron ore, for instance, hasn't been enough to compensate for the price declines."
BHP's board is set to decide within months whether to spend a sum estimated to exceed US$60 billion over several years on major projects such as the expansion of the huge copper, gold and uranium Olympic Dam mine in South Australia. Such investment would position BHP for continued earnings and production growth if the global economy picks up--but would also substantially reduce the resources it can apply to shoring up its flagging share price and leave it increasingly exposed if a global downturn weighs on demand in the longer term.
To reduce exposure to less-profitable mining activities, the company has been unloading smaller assets that don't fit with its strategy. BHP said Wednesday it continues to review its relatively small diamonds operation in Canada for possible sale, and is pushing on with the sale of a 37% stake in a South African minerals business to partner Rio Tinto.
Once a target for a takeover by BHP, Rio Tinto is also under pressure. On Tuesday it reported record production of iron ore for the first six months of 2012, but cut its output guidance for a string of other commodities amid caution about the global economic outlook.
Some investors and analysts argue that miners' share prices are out of line with their fundamentals.
"The market is viewing the world in a much deeper trough than it actually is in," said Shaun Manuell, chief investment officer of Equity Trustees Ltd.
Write to Robb M. Stewart at robb.stewart@wsj.com
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