What BHP Billiton plc’s Investment Plans Mean For Earnings Growth

Today I am looking at why I reckon BHP Billiton‘s (LSE: BLT) (NYSE: BBL.US) plans to slash capital expenditure looks set to hamper long-term earnings expansion.

Capex cuts undermine long-term growth outlook

Signs of accelerating economic cooling in emerging markets, combined with sluggish growth in Western economies, continues to hamper confidence amongst the mining sector. Following the banking crisis of five years ago, BHP Billiton and its peers have embarked on significant wallet tightening, a scenario which looks set to persist as commodity prices look set for further weakness.

BHP Billiton reduced capital expenditure to $16.2bn for the current year, down substantially from $20.9bn during 2013. Rather than ploughing BHP Billiton vast sums into building its arsenal of assets — a feature of the pre-recession mining space — the company is looking to maximise its returns from existing assets.

These measures already appear to be yielding promising results, with group chief executive Andrew Mackenzie noting last month that “the commitment we made 18 months ago to deliver more tonnes and more barrels from our existing infrastructure at a lower unit cost is delivering tangible results.”

BHP Billiton is aiming to boost productivity from lower-risk brownfield sites rather than acquiring new and costly mining assets, and last August vowed to dedicate $2.6bn towards transforming its Jansen potash asset in Canada into one of the largest potash mines on the planet.

At the same time, BHP Billiton remains engaged in an extensive divestment programme in order to reduce its non-core footprint and shore up the balance sheet. The firm sold off $6.5bn worth of assets last year alone, including the sale of its diamonds business last spring. More divestments are expected, with Glencore Xstrata commenting just this month that it was eyeing up BHP Billiton’s Australian nickel assets.

Near-term earnings improvement expected

City forecasters expect BHP Billiton’s extensive capital-saving drive to help it to rebound from two years of heavy double-digit earnings drops. Indeed, a 24% bounceback is anticipated for the 12 months concluding June 2014. Growth is expected to decelarate dramatically next year, however, with just a 2% increase expected.

However, I remain convinced that current earnings forecasts fail to fully address the hugely-lopsided supply/demand balances across many of the miner’s commodity markets, a situation likely to worsen from insipid growth in the global economy.

While metals and energy prices look set for further prolonged weakness, I believe that earnings growth is set to remain heavily constrained for some time to come. On top of this, a lack of significant investment in the next generation of mining projects is likely to constrain growth further out.

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