Why BHP Billiton plc Has Great Growth Prospects

BHP Billiton (LON: BLT) plc looks set to return to growth.

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opencast.miningAlong with the rest of the mining sector, BHP Billiton (LSE: BLT) (NYSE: BBL.US) has suffered from slowing Chinese demand — which has depressed metals and minerals prices and so hurt the miners’ profits.

But after a 30% fall in earnings per share in 2013, analysts are expecting 2104 to herald a return to growth. Here’s what they’re predicting:

Jun EPS Change P/E Dividend Change Yield Cover
2014 155p +15% 12.1 73.5p -0.5% 4.1% 2.1x
2015 168p +8% 11.1 78.5p +6.8% 4.3% 2.1x

Bullishness

Those expectations have become a little more bullish of late, with a few brokers lifting their price targets for companies in the mining sector. Investors seem to be taking notice too, as the BHP share price has picked up 8% over the past week or so to 1,896p — although over the past 12 months it is down 15%.

So what evidence is there that 2014 could be the turnaround year?

Record production

In its first-half production report for the six months to December 2013, BHP told us of rising production across most of its outputs. Iron ore was up 19% over the previous year’s first half, with metallurgical coal up 22%, copper up 6%, and aluminium up 8% — only petroleum products and energy coal production fell, and then by only 1% in each case.

That included production records for 10 of the company’s operations, and BHP maintained its full-year guidance for petroleum, copper, iron ore and coal — between them they account for most of BHP’s annual turnover.

More to come

Chief executive Andrew Mackenzie said that “…the December 2013 half year delivered a 10% increase in production and volumes are expected to grow by 16% over the two years to the end of the 2015 financial year“.

Tightening up on capital expenditure is also helping turn those record production figures into growing earnings — BHP has a total of $16.1bn earmarked for capital and exploration expenditure in the current financial year, down from $22bn in the previous year.

Are the shares cheap?

Barring a major slowdown in China, will those growing earnings translate into direct rewards for shareholders?

Well, a forward price to earnings (P/E) ratio of 12.1 for this year, falling to 11.1 a year later, is pretty undemanding — especially compared to the FTSE average of 17 right now. And dividends yielding better than 4% are way above a 3.2% average, so a price appreciation over the next 12 months looks likely to me — rival Rio Tinto looks cheaper on a December 2014 P/E of under 10, although forecast dividend yields are lower at 3.5%.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Alan does not own any shares in BHP Billiton.

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