Could BHP Billiton’s Situation Worsen Going Forward?



Commodity price environment

The current commodity price environment is one of the worst in history for mining companies. Commodity prices (COMT) are touching multiyear lows in 2015. The outlook for 2016 isn’t very bright.

As of December 11, 2015, benchmark 62% Fe China cost and freight (or CFR) prices were trading at $38 per ton, a fall of 45% year-to-date. Copper prices, coal prices, and oil and gas prices have also seen multiyear lows in 2015.

This has led major mining companies to lose significant value since the start of the year.

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BHP’s share price near decade low

BHP Billiton (BHP) (BBL) and Vale (VALE) have been hit particularly hard in the last month and a half due to a tailings dam failure at the iron ore pellet operation jointly owned by them.

BHP has also been under more pressure than its peers due to its significant exposure to petroleum and the steep fall in oil and gas prices recently. Investors were concerned about the sustainability of dividends at BHP Billiton due to weak commodity prices, and the Samarco disaster has increased their concerns.

Since the start of the year, BHP has fallen by 40% compared to a 28% fall in Rio Tinto’s (RIO) value. BHP is hovering near its ten-year low value. The commodity price outlook is still not bright, particularly for iron ore and coal prices. In such a scenario, the risk of a dividend cut could mean more downside for BHP’s share price.

Vale has seen a correction of 60%, while Cliffs Natural Resources (CLF) has had the worst fall of all, with a negative return of 73% in the same time period.

Other miners such as Freeport-McMoRan (FCX), Alcoa (AA), and Glencore (GLNCY) have also fallen considerably in 2015.

In this series

In this series, we’ll discuss the outlook for each of BHP’s businesses. We’ll see how the company is placed financially and if its cash flow generation going forward will be enough to cover its dividends. We’ll also analyze the alternatives available to BHP for maintaining its dividends.

We’ll start with looking at the damage the dam failure at Samarco could do to BHP financially and reputation-wise.


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