BHP Billiton Plans Growth Despite Low Commodity Prices

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With basic materials and energy stocks struggling to make profits in the face of low commodity prices, it’s a bit surprising to hear the chief executive of one of the world’s largest mining companies say that the company is well positioned to grow regardless of commodity prices. In fact, if commodity prices rise, well, that’s icing on the cake.

That’s what BHP Billiton Ltd. (NYSE: BHP) CEO Andrew Mackenzie told attendees at Merrill Lynch Conference in New York Tuesday morning. Mackenzie’s presentation noted four pillars on which the company is set up for growth:

  • Corporate resilience due to a strong balance sheet and high-quality assets
  • Recent 75% dividend cut
  • Flexibility offered by rising free cash flow
  • Disciplined capital allocation framework

Mackenzie said that existing opportunities offer the potential to grow value by approximately 70% and significantly improve the company’s return on capital. Improving commodity prices offer further upside.

Between the 2012 and 2015 fiscal years, the company has improved its productivity by a total of $10 billion, and Billiton sees an opportunity to gain another $2.2 billion in productivity improvements, including a charge of $1.4 billion to offset ore-grade declines at its Escondida copper mine in Mexico.

Billiton also expects unit costs to decline to around $14 per metric ton (tonne) at its Western Australia iron ore business; to around $55 per tonne for its Queensland coal operations; to around $1 a pound at Escondida; and to less than $10 a barrel at its conventional oil wells.

In the company’s remaining U.S. oil properties, Mackenzie said Billiton has about 1,400 liquids-rich wells that become profitable at less than $60 a barrel (he didn’t say how much less, but $40 is probably too low).

Billiton expects to spend $600 million to $700 million annually for petroleum exploration projects, both onshore and offshore, and an unspecified amount to explore for more copper discoveries.

Mackenzie’s presentation must have resonated with shareholders who have lifted the stock by about 2.6% Tuesday morning. The stock traded at $26.93, in a 52-week range of $18.46 to $52.43, and its consensus price target is $27.97.