BHP Billiton (NYSE: BBL) is a more than $100 billion major mining company with a dividend yield of almost 4%. The company has major mining operations in Australia, and as we will see throughout this article, the company’s impressive portfolio and growth along with the company’s strong balance sheet make it an incredibly strong investment opportunity at this time.
BHP Billiton Impressive Portfolio and Growth
BHP Billiton, as a mining company with a market cap of more than $100 billion, is one of the largest mining companies and has an incredibly impressive portfolio.
BHP Billiton Production - BHP Billiton Investor Presentation
For the September 2017 quarter, BHP Billiton experienced a modest decline in production in most of its production sectors, However, the company experienced a strong increase in production in its profitable copper sector along with a modest decline in the company’s iron ore production sector. The company experienced larger declines in its less profitable petroleum and coal segments.
Going into FY 2018, the company expects a continued decline in petroleum production and it anticipates coal production to remain fairly constant. However, the company expects a respectable 5% increase in its iron production increase and a similar increase in the company’s copper production. That increase should help support the company’s cash flow going forward.
BHP Billiton tried to enter the oil markets before the oil crash. The company felt that entering a new commodity, especially one with as large of a market as oil, with its size, could give the company both significant earnings and a new place to invest increasing capital. However, as oil markets crashed, it turned out to be a poor and expensive mistake for the company, which seems to be going back to its previous ways.
BHP Billiton Improvements - BHP Billiton Investor Presentation
Looking at the company’s overall goals, the company is continuing to strive to improve its costs and anticipates additional productivity gains of $1.3 billion with a 4% reduction in unit costs. That means the company will increase cash flow by roughly 1% of its market cap every single year thanks to its efforts in productivity. And that means ample cash flow to reward shareholders or buyback stock.
BHP Billiton also has additional projects approved, and has recently completed major projects. The company’s Escondida Water Supply project support its significant copper production and should provide it with growing revenue going forward. The company also has several new discoveries that can turn into new production. This new production will provide the company with growing income.
BHP Billiton Nickel West - BHP Billiton Investor Presentation
Nickel West is one of BHP Billiton’s larger projects, with a multi-billion dollar capex, and it makes BHP one of the largest producers for briquettes and powder. In the rapidly growing electric car industry, Nickel West is in a prime position with a significant amount of demand and location near the Asian market. This position will bring BHP Billiton a significant amount of income.
BHP Billiton is planning to significantly expand its Nickel West project bringing the company additional income. The company’s stage 1 project here to take capacity to 100 kilotons here remains on track and the company is considering a stage 2 to double production from there. BHP Billiton anticipates that Nickel West will be able to support the market until 2040 and would become the largest nickel sulphate project worldwide.
BHP Billiton Base Value Increase - BHP Billiton Investor Presentation
Overall, BHP Billiton’s impressive decisions have allowed the company to increase the base value of its operations over the past 12 months. At spot prices, thanks to the company’s actions and a recovering market, the company has more than doubled its base value at spot prices. Even at consensus prices, the company has achieved double digit increases in its base value.
That value has come from continued unit cost reductions and improved capacity. One of my favorite things the company is doing that makes it a good investment is the company is working on incrementally expanding production from its existing assets. That will decrease cost and expand production significantly from these assets with minimal capital costs.
On top of that BHP Billiton has a broad suit of opportunities to achieve further gains. The company plans to grow the base value of its assets by 50% with 10% of additional cost reductions and 20% of latent capacity additions. As a result of these things, the company has more than $25 billion of value in its growth portfolio that could increase its base value by 50%. That gives the company strong potential going forward.
BHP Billiton Growth Projects - BHP Billiton Investor Presentation
Looking at BHP Billiton’s portfolio of growth projects, the company has several growth projects that will provide the company with strong returns and volumes. The company has an amazing $25 billion of unrisked value from its projects with a return of more than 16%. The company anticipates that these projects will reduce its capital intensity while providing it with growing cash flow.
The company is executing projects within its capital allocation framework and plans on additional expansion. The company has a phased approach with a stage 1 IRR of more than 12% on almost $5 billion of incremental capital costs. The company anticipates stages 2-4 will achieve higher than these already impressive double-digit rates of returns meaning that the project overall will provide the company with billions.
The company anticipates that its Jansen project will help earnings from Potash investment, however, it has been put off until market conditions support it. The company also have 4 major copper growth projects that it anticipates will provide almost 1 million tons of additional volumes. These copper volumes should provide billions in additional cash flow similar to the Jansen project.
In the company’s exploration program, it has a strong portfolio of oil worth billions of dollars. Most importantly, the company has additional production it is working on with discoveries economical at less than $50 per barrel. That means the company’s profits from oil will remain strong, especially as oil prices recover. That makes BHP Billiton a strong growing investment at this time.
BHP Billiton Balance Sheet
On top of BHP Billiton’s impressive project and growth potential, projects that will generate the company billions in increasing cash flow going forward and have a unrisked value of $10s of billions, the company has also been hard at work on building a strong balance sheet. There’s a reason BHP Billiton is one of the highest valued mining companies in the world.
BHP Billiton Debt Reduction - BHP Billiton Investor Presentation
BHP Billiton has significantly improved its financial profile to maintain significant balance sheet strength through the cycle. The company decreased its debt from more than $26 billion to just over $16 billion over the past year, an incredibly performance in the company’s financial profile. The company generates more than $13 billion of cash flow annually or a 10:1 market cap to cash flow ratio, or incredibly impressive.
As we can see, the company’s debt has traditionally remained high, but has since dropped significantly. That means the company has a net gearing ratio of just 12% currently, incredibly respectable. On top of this impressive cash flow and debt reduction, the company continues to offer investors a respectable dividend of almost 4%.
That dividend along with an improved balance sheet shows the strength of BHP Billiton’s financials. And that’s one of the things that makes BHP Billiton a strong investment opportunity at this time.
And BHP Billiton’s debt maturities have an average maturity time period of 9.1 years. That means the company’s $16 billion of debt should come due at a rate of less than $2 billion per year. We saw in 2017 alone that the company paid down almost $10 billion of debt from its free cash flow. Given that the company’s cash flow should increase, the company will be able to easily pay down almost $2 billion a year in debt.
And most importantly, and one of the things that will make this company still a top tier investment, is the company will still have $8 billion annually in free cash flow to spend how it desires. The company can use this for additional investments or the company can use this to reward shareholders. Those rewards for shareholders will allow the company to undergo buybacks or increase dividends.
Overall, BHP Billiton’s impressive portfolio along with the growth potential of that portfolio and the company’s strong cash flow make it a strong investment. The company is increasing its cash flow and improving its balance sheet. In fact, after 2017, the company decreased its interest expenses by several hundred $ million. As a result, the company’s growth potential and finances make BHP Billiton a strong investment.
Conclusion
BHP Billiton has had a difficult time since the start of the oil crash. The oil crash combined with the commodity crash to put the company in a tough position. However, the company is still a massive company with a market cap of more than $100 billion and the company is in a solid position. The company has been focused on growing its market cap and its valuation and divesting of assets that aren’t as valuable.
BHP Billiton has an incredibly impressive portfolio of assets with significant growth potential. The company’s largest assets iron production and copper should have significant growth in the coming years. And the company has increased the base value of its assets significantly while paying down debt. As a result, in the coming years, the company’s cash flow should increase significantly supporting BHP Billiton’s value.
Overall, we can see here how BHP Billiton is a strong investment at this time.
Disclosure: I am/we are long BBL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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