24/7 Wall St.

BHP Billiton Ltd. (NYSE: BHP) had been trending lower for the past few years, until shares bottomed in January, when they kicked it into gear and began a more bullish pattern. One key analyst is seeing this pattern continue even further over the next year. Although this is far from the 10-year high above $100 (April 2011), Argus sees this company growing roughly another 25% from its current level.

Argus upgraded BHP to a Buy rating with a $40 price target. Argus also recently raised its rating on the materials sector to Overweight. Although BHP’s sales and earnings have been hurt by declining commodity prices, the firm thinks that prices for many products are nearing a cycle bottom.

Additionally, the firm noted that BHP has been able to limit the impact of weak pricing and strengthen its balance sheet through cost-cutting programs, asset sales and a sharp cut in its semiannual dividend. Argus also expects earnings to benefit over time from global economic stimulus measures and production cuts in China.

The company recently announced a change in its dividend policy. BHP’s new policy calls for the company to pay a minimum of 50% of its underlying profit in each reporting period. The board will then assess whether the company is able to make payments in excess of the 50% minimum requirement. In the second half of 2016, management paid $0.28 per American depositary share (ADS), for a full-year payout of $0.60. This was about 70% lower than the dividend paid in fiscal 2015.

Argus detailed in its report:

BHP remains exposed to risks related to the Samarco dam collapse. On November 5, 2015, mining waste burst from the dam and flooded the community of Bento Rodrigues, resulting in at least 17 deaths. The charge included a $525 million pretax impairment, which reduced the value of BHP’s Samarco investment to zero. In March 2016, Samarco agreed to settle a public civil claim brought by the Brazilian government and other public authorities. Subject to court approval, the deal calls for Samarco to pay $6.2 billion over a period of up to 15 years for clean-up costs and damages.

The company is also particularly exposed to trends in commodity and energy prices. Commodity prices have stabilized a bit in 2016, as the dollar’s upward trajectory has eased and value vultures have been drawn in by prices that are down sharply over the past two years. In January, the IMF Commodity Price Index had fallen almost 55% from mid-2014 highs, while the IMF’s Fuel Index had dropped 69%, the Metals Index was down 36% and the Agriculture Index was off 22%. But since those lows, the main commodities index has rebounded, led by metals and fuels.

Shares of BHP traded down 0.7% at $31.98 on Tuesday, with a consensus analyst price target of $30.58 and a 52-week trading range of $18.46 to $38.10.