It seems as though things cannot get any worse for BHP Billiton (LSE: BLT) (NYSE: BBL.US). The diversified mining company has seen its bottom line savaged by extreme falls in the prices of a range of commodities and, with its shares having fallen in value by 40% in the last year, being a shareholder in BHP has been extremely tough.
Looking ahead, things are set to get worse before they get better. BHP’s bottom line is due to fall even further in the next two years. In fact, it is forecast to be 60% lower in financial year 2016 than it was in financial year 2014, which is a huge drop and is likely to put the company’s share price under even more pressure. And, with the divestment of non-core assets and subsequent restructuring taking place during such a difficult period, BHP appears to have a very challenging period ahead of it.
However, it remains a high quality and relatively dependable mining company. Certainly, the short to medium term is likely to be tough, but for longer term investors there is considerable opportunity for BHP to strengthen its position within the mining sector as it seems likely to come through the present challenges in a much stronger position than many of its peers.
In fact, BHP’s restructuring, although painful, may be being undertaken at precisely the right time. That’s because, during more prosperous periods, it is difficult to drive through the maximum amount of efficiencies, effect vast cost cuts and avoid pet projects due to the future being viewed through rose-tinted glasses. However, during a challenging period it is much easier to be ruthless and turn a business into a leaner and more profitable entity. As such, short term pain may well lead to long term gain for BHP and its investors.
In addition, BHP also offers a superb yield so that, in the meantime, investors are generating a decent cash return on their investment. For example, BHP currently yields 6.6% and, while dividends may be cut over the next couple of years, it is likely that BHP will still offer a much better yield than the vast majority of its index peers.
Of course, switching BHP for a sector peer such as Rare Earth Minerals (LSE: REM) is a viable option. After all, Rare Earth Minerals is focused on lithium, for which demand is growing by around 10% per annum and, in the long run, could increase at a much faster pace due to the greater use of batteries that is being projected. And, with its pre-feasibility study having commenced at the Sonora project, news flow could be positive in the months ahead, with the potential for lenders to come on board to fund the project depending upon its outcome.
However, BHP appears to offer a more appealing risk/reward ratio than Rare Earth Minerals. That’s because it is better diversified, is less reliant upon individual pieces of news flow in the short run, has a much stronger balance sheet and also has scope to become leaner, more efficient and add shareholder value. Certainly, its share price has disappointed in the last year but, looking ahead, it seems to be a strong buy, while Rare Earth Minerals appears to be a stock to watch due to the significant amount of uncertainty that lies ahead, with its future being highly dependent upon a small number of key news items. As a result, sticking with BHP seems to be the right option for Foolish investors.
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Peter Stephens owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.