Under pressure from colleagues and subscribers, I have given in and have decided to stick my neck out on BHP Billiton. Is it still a buy or is it time to wave bye-bye?
This one-year chart of the stock tells the story of a terrific turnaround stock and has to be my best call of the year. I was pleading for experts to tell me $14 was the signal for a contrarian call on the stock. Personally, I waited until it was ensconced in the $15 mark before I started risking my dough but I never expected to see something like this:
Source: Yahoo!7 Finance
I don’t want the genius tag because my thinking was simple: “At these levels, provided I can wait two or three years, then I think the global economic recovery should bring a $20-plus stock price for one of the world’s greatest mining companies ever!”
If you bought at $16 and you made $4, that was going to be 25%. Over two years, that would be a nice 12.5% gain per annum, to use some simple arithmetic.
Anyone in the situation of the above example is up 56% in less than a year and it certainly is a good example of the old adage “the trend is your friend” but that has another part to it and it goes, “until it bends!”
So is the BHP share price trend getting close to a bend?
Recently, the Metal Bulletin said this: “The incredible iron ore rally came to a sudden halt overnight as prices fell 4.4% to US$77.30 a tonne.
“At the start of the week, iron ore looked unstoppable. Climbing above US$80 a tonne for the first time in over two years. Overall, the iron ore price had gained over 26% in November alone.”
Some curve balls are starting to be thrown out of China — the crucial customer for BHP and the like — so you have to work out if you want to take profit, gamble on higher prices or just hold as a long-term player.
The latter is the easiest play as I see BHP doing well over the next couple of years but it means you might have to endure a short-term sell off. The US stock market could easily sell off after its nice Trump rally and material stocks would be targeted as they have been positively trumped since the November 8 US poll.
On the other hand, recent work by BMI Research makes me a little positive about short-term gains. It says “iron-ore production growth is set to become stagnant, owing to contracting output by high-cost iron-ore producers in China, while output growth in Australia, Brazil and India will remain positive, enabled by a pipeline of expansion projects by major miners.”
If supply is not going gangbusters, that has to be good for iron ore prices and therefore BHP’s share price. BMI says BHP is still cutting costs, which also should help the bottom line and share price with “cash costs for the first half of 2016 of $15 a tonne, down from $18.5 a tonne in 2015.”
And the weaker dollar should help profits as well and this comes at a time when the post-Trump election win world seems to be signing up to greater infrastructure projects, explaining why I remain positive on BHP longer term.
The other positive story for BHP is the fact that the group of countries called the ‘Next 20’, with the likes of India, Mexico, Indonesia, Philippines, Nigeria, etc. are 27% of the world’s population and they have economic growth goals that will be good news for the likes of BHP.
Welekazi Cele, the regional director of Hatch — a mining and engineering consultancy — explains that “iron-ore consumption is driven primarily by steel demand for infrastructure development, which is linked to population and economic development.”
Mining Weekly recently added to my positive longer view for BHP actually quoting the company’s view: “BHP Billiton points out that, over the next 20 years, China’s urban population is likely to increase by almost 250 million people and the rising middle class will be looking to upgrade to ‘bigger and better apartments, sitting above more extensive underground car parks, which will demand steel-intensive building and renovation.”
Given all of this better information for holding BHP, let’s look at the analysts’ view from FNArena, with BHP at $25.02. The collective guess comes in at $24.27 but Macquarie is the most bullish at $28, while Citi is the most bearish at $20.50.
Out of the eight surveyed, three were in the outperform or overweight category, four were holds or neutral, while Citi was the seller citing expected lower commodity prices.
To be fair, some of these assessments might have come before the OPEC meeting that is bound to help BHP and its oil play.
There is also an interesting omen pointed out by Eva Brocklehurst, writing in FNArena, that as “Goldman Sachs notes that historically, when the US and Chinese output gap closes and inflation begins to rise, this is a buy signal for commodities.”
That has been happening and “Morgan Stanley notes the shock of the US election is now passing and commodity prices are normalising, largely via currency adjustments. The broker suspects the proposal to rebuild US infrastructure is probably bullish for metal trades given the size of the US economy. The US economy currently consumes up to 20% of the world’s metal ore supply and was the biggest buyer before China became fully engaged in global trade a decade ago.”
Meanwhile ANZ’s analysts believe “a sustained downturn in iron ore prices looks increasingly unlikely.”
Solid demand from China and supply disruptions should augur well for iron ore, they argue. But wait, there’s more.
“Goldman Sachs is also more constructive on the iron ore outlook in 2017. Demand has surprised to the upside in China after the credit stimulus earlier this year. Supply, on the other hand, was slow to increase because of delayed capital expenditure and operational challenges,” Brocklehurst reports.
So what’s my BHP call? If you’d hate yourself if the price falls to say $22-$23, then take profit. If you want to see a $28 figure for the stock, then keep the faith, as the 2017 outlook seems ultra-positive. And if you’re purely a long-term player, then BHP is so well-placed to benefit from the global trends of bigger budget deficits, great infrastructure spending, more solid economic growth and inflation. On the local front we will be spending on infrastructure and the dollar should go lower after the Yanks start raising interest rates in a couple of weeks’ time.
What could make me less confident about my economic expectations?
I think a financial market scare following the Italian referendum that undermines confidence in the European Union and brings into question the safety of Italian banks. I don’t want to see any “banking crisis” headlines!
I’m keeping my BHP stocks for the moment and probably for at least two more years, or even longer! The global economic picture and the reality of President Donald Trump will be the determining issues for me and BHP.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
