Will the Samarco disaster do for BHP Billiton (LSE: BLT) what the Gulf of Mexico oil spill did to BP?
BHP shares have fallen by around 10% since it emerged that Brazil’s public prosecutor is seeking $43bn of damages from BHP and its partner Vale. The prosecutors have apparently based their damages claim on the $55bn BP has spent so far on cleaning up the Gulf of Mexico oil spill and paying out compensation.
BHP had obviously hoped to avoid legal action of this kind by previously agreeing a framework for restoration of the environment and communities affected by the dam failure. However, this agreement has not yet been approved. There now seems to be a risk that this more flexible agreement will be overshadowed by a more aggressive law suit targeting higher levels of compensation.
We’re not likely to know the final cost for several years. In the meantime, BHP shareholders like me must decide whether to hold onto their shares or sell up and look elsewhere.
Improving outlook?
In my view, selling BHP now could be unwise. Recent increases in the price of iron ore and oil should have delivered substantial benefits for BHP. Over the last month, consensus forecasts for current year profits have risen from 19% from $791.6m to $942.9m. BHP’s net profit is expected to double to $2.1bn in 2016/17.
Although the profit forecast for next year only equates to earnings of $0.44 per share, BHP is starting to feel the benefit of much lower costs and stabilising commodity prices. I suspect we could now see several years of earnings growth, even though oil and iron ore prices are unlikely to reach previous highs.
On this basis I intend to hold onto my BHP shares, probably for several more years.
I might sell this one
I’m less committed to my stake in South African platinum miner Lonmin (LSE: LMI). This has been an excellent investment for me, delivering a profit of well over 100% in less than six months.
Lonmin is due to publish its interim results on 16 May. I will be looking closely at these to see if the firm’s turnaround seems likely to succeed where it has failed in the past.
Market conditions have definitely helped Lonmin over the last six months, as the price of platinum has risen by more than 22% this year. The weakness of the South African Rand against the US dollar has provided a further boost, but I want to see evidence that the firm is building a profitable and cash generative business that can weather future downturns.
What we do know already is that number-crunching City analysts are gradually turning more bullish on Lonmin.
Although a loss is forecast for this year, the size of the expected loss has fallen from -$0.91 per share in November to just -$0.20 per share at present. A further improvement is expected in 2016/17, with current forecasts suggesting Lonmin may break even.
The reality is that it’s too soon to say when Lonmin will start turning a profit. I’m tempted to sell my shares and lock in a healthy gain, but with market conditions I’ve decided to wait for the next set of accounts before making a decision.
