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Why BHP Billiton plc Has Great Growth Prospects

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%.

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> Alan does not own any shares in BHP Billiton.