Company Overview -  BHP Billiton Limited is a global resources company. The Company is engaged in exploration, development, production, processing and marketing of minerals, such as iron ore, metallurgical and energy coal, copper, aluminum, manganese, uranium, nickel, silver and potash. It is also engaged in exploration, development, production and marketing of conventional and unconventional oil and gas. The Company operates through segments: Petroleum and Potash, Copper, Iron Ore and Coal. The Company's Petroleum and Potash segment is engaged in exploration, development and production of oil and gas and potash pre-development. The Copper segment is engaged in mining of copper, silver, lead, zinc, molybdenum, uranium and gold. The Iron Ore segment is engaged in mining of iron ore. The Coal segment is engaged in mining of metallurgical coal and thermal (energy) coal.


BHP Details
 
Focus on only value based exploration projects: BHP Billiton Limited (ASX: BHP)is focused on three conventional deep water basins in the Gulf of Mexico, the Caribbean and the Northern Beagle sub-basin off the coast of Western Australia for its petroleum exploration. BHP also enjoys a dominant ‘first mover’ deep-water acreage position in the Caribbean. For FY16, US$640 million exploration has been said to be planned for petroleum business. For copper exploration, the group is focusing on copper porphyry and skarn deposits located at Chile Peru and the south west of the United States. The group has Sediment hosted deposits with >2% grade in north of Canada and iron oxide copper gold deposits with >2.5% copper equivalent grades in South Australia’s Stuart Shelf. The group reported that they invested in Mad Dog 2 and Spence projects, under quality growth projects in oil and copper. After witnessing a positive exploration results at Shenzi North, the group is planning to drill a further exploration well (Caicos) in July 2016 on its nearby Green Canyon 564 lease (wherein the group has 100% interest). BHP also reported that they intend to increase the number of copper targets for testing by 38% during this year. On the other side, BHP is even seeking to enhance the efficiency of its exploration activities. Accordingly, the group undertook a wide range of improvement initiatives for its copper exploration. The group partnered with Bristol and Wollongong Universities on determination of mineralization and pursuing potential to leverage its Petroleum geoscience to identify Prospective sediment-hosted-copper deposit basins. The group is using technology to enhance its expenditure efficiency by using drone mounted sensors which enable wide coverage and improve safety. Down-hole assay tool allows rapid, on-the-ground analysis and sampling. The group is seeking the potential to apply Petroleum directional drilling techniques to Copper exploration.
 

Enhancing exploration efficiency (Source: Company Reports)
 
Strong balance sheet and cash flow:The Group has free cash flow of around USD5.4 billion per annum over the last three years, even after spending over USD 16 billion on capex per year. This indicates that the company has strong fund capacity to invest in increasing capacity and even after reporting double digit rise for number of its segments, the capex outlook is positive. BHP reported that the company intends to invest around US$700-900 million of annual spend over FY16 -18 in exploration activity i.e., 18% of its overall capital budget. Moreover, it is also focusing on reducing exploration costs, which was reduced 70% in 2013 and targeted 44% for FY17.
 
Improving coal business: BHP has decided to improve returns of its coal business by unlocking productivity, reducing costs and releasing latent capacity. Coal business has delivered over US$ 3 billion of productivity gains since 2012 and company has targeted another US$600 million by FY17. Coal has witnessed flattened cost curve while lower prices are leading to closures or reduced investments. BHP is also targeting wash plant utilization of 8000-hour by FY19. Additionally, it had simplified its coal portfolio by divesting into South32, while IndoMet Coal and San Juan Mine were sold off. Its Navajo coal to NTEC transition is on track for end- CY16. The rise in steel and iron ore demand would be the future demand driver of coal while China and India would see further growth in steel output. Scarcity of high-quality resources coupled with long term demand for coal underpins robust outlook for the group’s BHP business. Energy coal, which is an important part of global energy complex, would continue to see robust demand growth in next few years.
 

Resilient portfolio (Source: Company Reports)
 
New operating model with managerial strength: BHP has new operating model run by experienced team with average industry experience of 23 years across 6 continents and 13 commodities. The new model emphasizes on enhancing volume and reduction in cost along with safety measures. Going forward, BHP intends to improve productivity with further US$3.6 billion of gains by FY17 and reduce unit costs to half from what it was five years ago.On the other side, the group expects to add over 1 million tonnes of copper equivalent capacity at a total capital cost of less than US$1.5 billion. This addition is more than 10% of BHP Billiton’s total current production. BHP is taking steps to maximize the value of its high quality shale assets when the prices recover.


Opportunities for driving BHP’s growth (Source: Company Reports)
 
Operational update for nine months ended on March 2016:  BHP declared that the Group is on track to deliver an average unit cost improvement of 14% across its major assets driven by its productivity gains. BHP maintained the guidance for petroleum, copper and coal for FY16, but reduced to 260 MT down 10 MT due to natural adversity. The group has finished its Escondida Bioleach Pad Extension project, which involved the expansion of the leach pad to four layers, during the March 2016 quarter.
 

 
Guidance (Source: Company Reports)
 
Samarco update: BHP lately reported that the Federal Prosecutors’ office has begun proceeding against Samarco Mineragao S A (Samarco) and BHP Billiton, Brazil for BRL 155 billion (US$43 billion) for social, environment and economic compensation. On the other hand, given the group’s strong track record, we believe BHP would be able to withstand any pressures related to the Samarco event. After the fatal incident that occurred at Samarco in November 2015, BHP said it is committed to helping Samarco to rebuild the community and restore the environment affected by failure of the dam. BHP has entered into an agreement along with the Vale SA to offer the establishment of fund of BRL20 billion in aggregate for clean-up costs and damages relating to the dam failure.
 
Stock performance:The shares of BHP fell over 24.54% in the last one year (as of July 12, 2016) due to volatile commodity prices. Accordingly, BHP has positioned itself to withstand these subdued prices. With the recent turnaround in commodity prices, BHP prices recovered around 32.78% in the last six months (as of July 12, 2016) and we believe this momentum in the stock would continue in the coming months. This recovery in the prices coupled with the group’s efforts to control its costs would further drive the stock performance. For the nine months ended on March 2016, the Onshore US drilling and development expenditure was about US$1.1 billion, which is 63% lower as compared to the nine months ended March 2015. BHP Billiton Limited (ASX: BHP) has diversified commodities in its portfolio including oil, iron ore and copper, and therefore the performance of the company is not linked to the performance of a single commodity unlike other mining giants. The group has even spun off its non-core businesses into South32 Ltd (ASX: S32) and retained its core iron ore, petroleum, copper and coal businesses. This has further helped company to reduce costs and simplify its business in response to the commodity price downturn. Management reported that their quality portfolio of tier 1 assets offers attractive medium-term growth options. The group had four major projects under development in Petroleum, Copper and Potash, and has an overall budget of US$6.9 billion over the life of the projects as of March 2016 quarter ending. Moreover, the stock is trading at an impressive dividend yield. Based on the foregoing, we give a “Buy” recommendation on the stock at the current market price of  $20.58
 

BHP Daily Chart (Source: Thomson Reuters)

---

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.