BHP Billiton(LSE: BLT) will be glad to see the back of2015. Indeed, even though were barely four months into the year, the company has already been hit by a wave of bad news and things could get a lot worse.
Uncertain industry
BHPs biggest problem by far is the sliding price of iron ore. Yesterday, the price of iron ore settled at $48 per tonne, a 10-year low, and Australias government believes that the price could drop another $13/t, to $35/t.
Its estimated that BHP produces iron ore for around $34/t. On that basis, the company could see margins at its iron ore division squeezed to zeroover the next 12months.
Unfortunately, BHPs troubles dont stop there. Commodity prices around world are in free-fall and the outlook for BHPs spin-off, namedSouth32, is rapidly deteriorating.
Spin-off
When separated from its parent, South32 will own someattractive long-life assets. These include the Worsley alumina refinery in Western Australia, Cerro Matoso in Colombia one of the worlds largest nickel producers and Cannington, the worlds largest silver mine.
However, following a 15% reduction inaluminium price forecasts and 10% fall in nickel price projections, the value of South32s assets, which were worth $16bn last year, has fallen 25% to $12bn at time of writing. In addition, City analysts have reduced South32s initial earnings estimates by 26%.
This isnt good news. BHP has already spent$270m planning the South31 separation so it cant stop the process now. Another $468m of costs are expected when shareholders approve the deal, bringing the total cost of the divorce to $738m.
Tax troubles
BHP cant control falling commodity prices, but the companycan control its tax affairs. Unfortunately, on this front, BHP has failed to live up to expectations.
In particular, the company is now under pressure from the AustralianSenates inquiry into tax avoidance.The inquiry was set up to investigate alleged widespread profit shifting to low-tax regimes, specifically Singapore, by large multinational corporations.
BHP, and the companys peersRio TintoandGlencore,all stand accused offunnelling sales from Australian operations through Singapore to lower their tax bills.
According to news reports, BHP has beenreprimanded for stonewalling the enquiry. The group has failed to providebasic financial information about its own operations and has suffered serious reputational damage in Australia as a result.
The bottom line
With all these factors bearing down BHP, City analysts have slapped an unprecedented number of sell recommendations on the companys shares. But this doesnt mean you should follow these recommendations and sell up.
Indeed, as the worlds largest diversified mining company, I think BHP is a great long-term play on global economic growth.
Still, beforeyou make any trading decisionI strongly recommend that you do some additional research of your own on BHP — you may come to a different conclusion.
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Rupert Hargreaves has no position in any shares mentioned. 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.