Positive Commodities Cycle Seen Supporting BHP Billiton

BHP Billiton Limited (NYSE:BHP) is a natural resource conglomerate engaged in discovery, acquisition, development and marketing as one of the world’s largest mining companies.  Year-to-date, the company’s stock prices have seen a strong run, with valuations moving from $25.48 in early January, to $30.74 in September.

This remarkable rise of roughly 25 percent has been attributed to positives seen in the current commodities cycle and as long as base metals prices remain elevated, there is little reason to believe these trends will be ending anytime soon.  This is one of the reasons why fund ownership of BHP Billiton is rising, and this also helps to explain the increases in investor interest that have been present over the last three quarters.

Chart View: BHP Billiton 1-Year

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The company reported an underlying EBITDA of USD 12.3 billion for the period ending on June 30, 2016. The exceptional rise 41 percent in the EBITDA margin was achieved through a 16 percent reduction in unit costs. BHP Billiton also reported an EBIT of USD 3.5 billion with an underlying attributable profit of USD 1.2 billion during the same period.

Segment Performances  

The company’s various segments have contributed to overall results.  Petroleum, copper, iron ore, and metallurgical coal were seen contributing EBITDA margins of 54 percent, 35 percent, 53 percent and 17 percent respectively. In its outlook, we can see that the company expects to have stronger demand from emerging economies due based on increased urbanization, improved industrialization, and freer trade policies.

The rise in the stock price is also attributed to the rallies being seen in commodity markets. Since January 2016, the price of crude oil has risen by 48 percent, copper has risen by 9 percent, iron ore has risen by 37 percent and has coal has risen by 27 percent. These improvements in valuations directly impact revenues for the company and, ultimately, the profitability of the organization. This has been reflected in the stock price of BHP in recent weeks.

Metals Markets

According to many of the consensus estimates, prices in commodities have the potential to extend further.  Specifically, the quarterly consensus estimates are calling for a rise in crude oil to 46.5 USD/bbl., copper to USD 2.12 per lb., iron ore to 60.40 USD/MT and coal to 66.90 USD/MT.  These estimates are unlikely to see much alteration unless we see a significant downtick in global economic activities.

The positive commodity cycle has been helped with strengthening economic activities across the globe (and specifically in emerging economies).  All of this in combination creates a more positive backdrop for BHP Billiton, and this should continue fueling the price of the stock. Against this backdrop, analysts like Argus, Jefferies, Macquarie, and JPMorgan have upgraded the outlook for BHP, and it is still expected that individual investors will follow suit.

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