Must-know: The outlook for BHP and NewCo

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Aug. 29 2014, Updated 5:00 p.m. ET

BHP’s outlook

BHP’s outlook seems to be positive considering the productivity and cost control measures that the company has initiated. With fewer assets to manage, BHP Billiton (BHP) should be able to improve productivity quicker. The company is targeting at least $3.5 billion of sustainable, productivity-led gains by the end of fiscal year 2017 (or FY17). Also, BHP has a low-cost position in almost all of the commodities that it operates in. This gives BHP an advantage compared to its peers like Fortescue Metals Group (FMG), Atlas Iron (AGO), and Whitehaven Coal (WHC).

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The chart above shows BHP’s strong production growth path. BHP and its peers, like Rio Tinto (RIO) and Vale SA (VALE), are trying to increase production in an already oversupplied market. This will add to their market share. However, this will be negative for cash flows while the time commodities’ prices remain depressed.

We still believe that BHP should be able to reduce its net debt to the targeted level of $25 billion. This will initiate a buy-back program. Investors will welcome the buy-back program. Strong cash flows and profitability will support and benefit the share price—even in a falling commodity price environment.

NewCo outlook

There is one very important question about NewCo that needs to be answered. Are there any growth projects that might start developing under the new company? This wasn’t possible under BHP because it was competing for capital strategy.

We believe that there are many assets under NewCo that can be developed very profitably. Nickel assets have a reserve life of 32 years. Its development should be a high priority for the new company. Nickel prices are on an upswing after Indonesia’s export ban.

For aluminium, there are constraints like power availability in South Africa. However, development should be profitable because of increasing aluminium prices. The aluminium industry’s fundamentals are also attractive. They’re driven by the rising deficit and increased demand from the automobile and aerospace sectors.

Even for other assets like the Cannington silver mine, a mine extension could add value to NewCo’s shareholders.

Mining companies with exposure to aluminium and nickel, including Rio Tinto (RIO), Alcoa Inc. (AA), Vale SA (VALE), and MMC Norilsk Nickel (or NILSY), have given bullish comments about the outlook for these commodities in their recent results. Exchange-traded funds (or ETFs) like the SPDR S&P Metals & Mining ETF (XME) also provide exposure to metals and mining sector. To learn more about BHP, please read Must-know: An investor’s guide to BHP.

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