Is BHP Billiton plc Set For Electrifying Earnings Growth In 2014?

Today I am looking at the earnings prospects for natural resources play BHP Billiton (LSE: BLT) (NYSE: BBL.US) in 2014.

Mining giant remains stuck in a hole

I believe that BHP Billiton is set to remain at the mercy of lingering weakness in commodity markets next year. The effect of wavering confidence in the global recovery, combined with rising production in many of its key markets, has seen supply/demand balances deteriorate markedly this year. And this looks likely to remain the case entering 2014.

Ramp-ups across its global assets continue to drive total commodity production higher, and output jumped 11% alone during July-September. And the resources giant expects output to continuing ratcheting higher — indeed, chief executive Andrew Mackenzie told investors this month that “we expect to deliver growth of 16 per cent, in copper equivalent terms, over the next two years.” But the company is unlikely to fully enjoy the fruits of its labours as a backdrop of subdued demand saps prices.

Still, BHP Billiton’s operational prowess has also been underlined by improving cost performance in recent times, due in part to lifting volumes with existing equipment, and controllable cash costs dipped by $2.7bn last year.

In light of continued uncertainty for commodity markets, the company has also slashed capital expenditure 25% for the year ending June 2014, and is planning to cut capex again in the following year. BHP Billiton has also been pro-active in shedding non-core assets as part of its bid to build a more streamlined and efficient earnings machine, and has completed six major divestments so far this year.

Broker Investec expects BHP Billiton to print a modest improvement in earnings for 2014, rising just 1% from the previous year to 248.3 US cents per share. And growth is expected to accelerate thereafter to 277.1 cents, a 12% increase.

These figures leave the company dealing on P/E ratings of 12.2 and 10.9 for these years. This makes the miner an average pick compared to its diversified mining peers, beating Glencore Xstrata’s 2014 readout of 13.3 but lagging Rio Tinto which deals on an earnings multiple of 10.4.

But in my opinion the mining sector is a realm suitable only for those tolerant of extreme risk. Companies across the space have suffered severe weakness in 2013, particularly as enduring macroeconomic pressures have compounded already weak fundamentals in most commodity markets. And I fully expect these problems to last long into 2014 and beyond, with signs of slowing global growth ready to hammer natural resource prices still further.

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> Royston does not own shares in any of the companies mentioned in this article.