BHP in Positive Territory for the Year

Last week BHP Billiton [ASX:BHP] had one of its best performances in 2016. Shares rose 13.49% to $17.70 per share. The big news last week was BHP’s agreement with the Brazilian government. Finally the Samarco dam disaster has come to an end. It’s not that BHP can put the whole situation behind them, but an agreement has put a finally ending on the controversy and estimated cost.

The agreement between BHP, Value and the Brazilian Government will play out over 15 years. BHP will pay US$1.1 billion for the first three years (starting 2016). And make further payments between US$200–400 million for the following 12 years.

Investors were also happy with Standard & Poor’s (S&P) affirmation of BHP’s ‘A’ credit rating. The big miner’s credit was downgrade from A+ to A just last month. S&P’s fears were directly related to declining commodity price. However BHP is still betting on an increase in demand from China on a long term basis.

But once BHP decided to cut dividends to build up cash for a rainy day, the big rating agency was satisfied with BHP’s ability to pay their debts. The combined positive news was the reason for the 13.49% increase last week. Whether BHP can match their share price gain again this week is uncertain. But right now they’re off to a good start.

This morning shares jumped up 5% on open, and are continuing to creep up as the day goes on. Instead of company news helping shares, this time it was overseas trading. In US trade BHP Billiton [NYSE:BHP] climbed 7.13%. And in London trade BHP rose 8.64%. It’s not uncommon for BHP to follow the climbs made overseas, before the Australian market opened.

But if you’re thinking this could be the turning point within the mining sector, you could be a little premature. Sure commodities might be showing signs of hope from the start of this year, as shown by the graph below.

Commodities prices Copper Zinc Iron ore

Source: Thomson Reuters Datastream

But if we take a long run view on commodities the picture isn’t so great. The Reserve Bank of Australia Index of commodities is still below 2005 levels. Many analysts believe the commodity rebound has actually been overvalued.

RBA index of commodity prices march 2016

Source: RBA

But regardless of if the rebound is overvalued or not, BHP is cheap historically. What we are seeing is investors getting in, at what they believe are cheap prices. However we must remember that BHP is not a short term play. Sure shares have yielded returns in double figures in the past week. But to see any really returns, investors might need to hold BHP for the long haul.

Härje Ronngard,

Junior Analyst, Money Morning

PS: BHP has fallen 42% since March last year. It’s definitely a stock that bargain buyers are looking at. However there are plenty of other beaten down blue chips out there which you could get your hands on.

According Money Morning’s Publisher Kris Sayce, there are five beaten down blue chip in the market right now.  In Kris’s report ‘Five Beaten-Down Aussie Blue Chips to Buy Today’ he’ll brief you on everything you need to know. When it’s right to SELL all your dividend-payers and why moving some of your capital into beaten down blue chip stocks is a good idea.

To find out the above and much more check out Kris’s report. To get your free copy, click here.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


Money Morning Australia