Stock of the week: BHP Billiton returns to ‘buy’ list
It’s been a tough few years for the mining sector. Demand for commodities in China slowed just as the mining companies were aggressively expanding capacity and production. This led to a supply glut and a fall in commodity prices. Big mining groups such as BHP Billiton suffered as a result and huge asset sales were made, along with enormous losses and dividend cuts.
The mining groups have therefore cut back on large scale investment programmes, drastically cut their costs and focused on balance sheet repair. This has left the likes of BHP Billiton as far more streamlined operations. On top of this we have seen a modest recovery in a broad range of commodities since the lows of early 2016.
These factors have led to BHP reporting encouraging numbers in recent trading updates. At the half year stage they reported profits of $3.2bn versus a loss a year earlier of $5.7bn, net operating cash flows were up by 46%, the interim dividends jumped to 40c from 15c while the net debt had fallen by 23% to $20bn.
The restructuring is taking BHP Billiton back in the right direction and we believe that the worst may be over for the commodities sector. We are therefore reinstating our ‘buy’ recommendation on the stock for investors seeking balanced return and willing to accept a medium to high level of risk.