BHP Billiton demerged with South 32 in 2015 which even following its demerger. BHP is the largest diversified miner in the world and the largest company measured by market capitalization listed on the ASX. BHP shares are also quoted on the New York Stock Exchange and London Stock Exchange (BHP LSE and BHP NYSE)
The separation of the company allowed BHP to focus on a portfolio of top tier lowest cost base assets. Covering a selected number of commodity where it sees a future.
There has been no sign of recovery in China. The shift in lower level of growth at 6.5% for the rest of the decade reinforces the commodity super cycle idea was a dream rather than the reality.
BHP Share Price History
In the last 24 months, the key commodities for BHP from Copper, Iron Ore and Oil have come off the super cycle highs. The decline in the Australian dollar was a favorable tailwind which has also come to an end.
Samarco Mine disaster in Brazil could not have come at a worse time for BHP. It adds further pressure on the company in managing the possibility of lower for longer commodity price environment.
Samarco Mine is a Joint Venture between BHP and Vale. It generated around 5% of EBIT for BHP with a long mine life of 30 plus years. After tax charge write off made totaled $858 million USD. This equate to total value of the asset on the company’s balance sheet.
BHP share price today has barely recovered because there are still a number of issues relating to the disaster going forward:
- Total cost inclusive of clean up and penalties
- There will be a drawn out legal process before the final number is finalized due to politicization of the disaster by Brazilian government.
- Impact on the removal of not only current production but also future growth pipeline
BHP management should applauded in addressing the issue head on and working with the authorities in assisting the initial search and rescue as well as providing operational support.
BHP Dividend – Rebased for sustainability.
The original goal of the BHP progressive dividend policy is to reward shareholders with a gradual year on year increase in dividend. While there are no doubt that like RIO, BHP holds some of the best assets in each of the main commodity it operates in.
Unlike bank dividend policy like NAB and ANZ. We were skeptical if it is appropriate for a mining company to institute a fixed commitment year in and year out for what is a cyclical industry.
The fall in commodity prices and associated decline in earnings means that debt have to be raised to pay for dividend at the bottom of the cycle when the investment return is the highest. This is not conductive for the BHP share price in the long run.
In early 2016, the management decided given the weak commodity price context the policy is no long sustainable. It introduced new criteria for dividend payments based on:
Annual dividends paid is set at a minimum of 50% of underlying profit
- At least USD $0.04 per share
- additional USD $0.12 per share announced by the board covering the most recent payment period.
Chart above shows the 10 year history of dividend per share paid by BHP. The amount in the chart are in Australian dollars. Important to note that the above chart does not include amount used for share buy backs or franking credit per share.
A deteriorating forward commodity price curve coupled with a weak balance sheet capped BHP share price. Upward 45 degree trendline only looks good if there is no cliff at the end of it.
BHP Share Price Forecast
We expect the company to under perform the broader mining sector for the foreseeable future. The weakness can be attributed to uncertainty regarding Samarco clean up cost, sub optimal balance sheet and exposure to the volatile oil price.
Standard and Poors downgraded BHP credit from A+ to A. If commodity price remains weak at this level then there could be further cuts in the dividend or cut capital expenditure to maintain the balance sheet at investment grade rating.
This is why we prefer Rio Tinto over BHP out of the large diversified miners. Rio’s management does not have to make such harsh decision because they learned the mistake from last commodity downturn during GFC. Balance sheet is king.